ITEM 2. Properties.
Our U.S. distribution center is a fully automated facility based in Louisville, Kentucky. During fiscal 2016, the Company purchased this facility for approximately $28.8 million. In February 2016, the Company entered into a ten-year $21.5 million real estate secured loan to partially finance this purchase.
ITEM 3. Legal Proceedings.
ITEM 4. Mine Safety Disclosures.
Not applicable.
PART IIBusiness Segments
Our businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail, Americas Wholesale, Europe, Asia and Licensing. The Americas Retail segment includes our retail and e-commerce operations in the Americas. The Americas Wholesale segment includes our wholesale operations in the Americas. The Europe segment includes our retail, e-commerce and wholesale operations in Europe and the Middle East. The Asia segment includes our retail, e-commerce and wholesale operations in Asia and the Pacific. The Licensing segment includes our worldwide licensing operations. Refer to “Part IV. Financial Statements – Note 18 – Segment Information” in this Form 10-K for disclosures about our segment financial information.
Americas Retail Segment
In our Americas Retail segment, we sell our products direct-to-consumer through a network of directly operated retail and factory outlet stores and e-commerce sites in the Americas.
Retail stores and concessions. Our Americas Retail stores and concessions are comprised of a mix of GUESS? factory outlet stores, full-priced GUESS? retail stores, G by GUESS (GbG) stores, GUESS? Accessories stores and MARCIANO stores. During fiscal 2021, we made the decision to integrate our G by GUESS brand into our Factory business over time in order to drive further efficiencies. During fiscal 2022, we opened 10 new stores and closed 17 stores in the Americas, ending the year with 388 stores. This store count does not include 29 concessions in Mexico. We directly operated our retail stores and concessions in Mexico and Brazil through our majority-owned joint ventures.
e-Commerce. Our Americas Retail segment also includes our directly operated retail and other marketplace websites in the U.S., Canada, Mexico and Brazil. These websites operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands. They also provide fashion information and a mechanism for customer feedback while promoting customer loyalty and enhancing our brand identity through interactive content online and through smartphone applications. Our U.S. and Canadian online sites are fully integrated with our customer relationship management (“CRM”) system and loyalty programs. Omni-channel initiatives that we have already deployed in the U.S. and Canada include “buy online, pick-up in stores” or “buy online, return in stores” and “order from store” as well as mobile-optimized commerce sites and smartphone applications. In the U.S. and Canada, e-commerce orders may be fulfilled from our distribution centers, or from our retail stores, or both.
Americas Wholesale Segment
In our Americas Wholesale segment, we sell our products through wholesale channels throughout the Americas and to third-party distributors based in Central and South America as well as licensed retail locations operated by our wholesale partners. Our Americas Wholesale business generally experiences stronger performance from July through November. Our Americas Wholesale customers consist primarily of better department stores, select specialty retailers, upscale boutiques as well as select off-price retailers. Our products were sold to consumers through approximately 1,450 and 1,350major doors in the Americas, as well as through our customers’ e-commerce sites, as of January 29, 2022 and January 30, 2021, respectively. As of January 29, 2022, these locations included approximately 750 shop-in-shops, a designated selling area within a department store offering a wide array of our products and incorporates GUESS? signage and fixture designs. These shop-in-shops, managed by the department stores, allow us to reinforce the GUESS? brand image with our customers. Many department stores have more than one shop-in-shop, with each one featuring women’s, men’s or kids’ apparel and handbags. We also sell product to licensed retail stores and concessions operated by certain wholesale customers. As of January 29, 2022, we had 34 licensed retail stores in the Americas, all of which were located in Central and South America. This store count does not include one concession that was operated by one of our partners in the U.S.
Our Americas Wholesale merchandising strategy is to focus on trend-right products supported by key fashion basics. We have sales representatives in New York, Los Angeles, Toronto, Montreal, Mexico City and Vancouver who coordinate with customers to determine the inventory level and product mix that should be carried in each store. Additionally, we use merchandise coordinators who work with the stores to ensure that our products are displayed appropriately. During fiscal 2022, our two largest wholesale customers accounted for a total of approximately 3.9% of our consolidated net revenue.
Europe Segment
In our Europe segment, we sell our products through direct-to-consumer and wholesale channels throughout Europe and the Middle East.
European Direct-to-Consumer. Our European direct-to-consumer network is comprised of brick-and-mortar retail stores and concessions and e-commerce sites.
Retail stores and concessions. Our European retail stores and concessions are primarily comprised of a mix of directly operated GUESS? retail and outlet stores, MARCIANO retail stores, GUESS? Accessories retail and outlet stores, GUESS? Footwear stores and GUESS? Kids stores. During fiscal 2022, we opened 71 new stores and closed 22 stores, ending the year with 556 directly operated stores in Europe and the Middle East. This store count does not include 50directly operated concessions in Europe. Certain of our European stores require initial investments in the form of key money to secure prime store locations. These amounts are paid to landlords or existing lessees in certain circumstances.
e-Commerce. Our Europe segment also includes our directly operated retail and other marketplace websites. In Europe, similar to the Americas, our e-commerce sites operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands. We have deployed omni-channel initiatives in our European markets, including “buy online, ship from store” and “buy in store, deliver by e-commerce.” We currently offer interactive content online and via mobile, and are planning to expand to smartphone applications.
European Wholesale Distribution. We sell our products both through wholesale distribution channels and through licensed retail stores and concessions operated by our wholesale partners throughout Europe and the Middle East. Our European wholesale business generally relies on a large number of smaller regional distributors and agents to distribute our products primarily to smaller independent multi-brand boutiques. Our products are also sold directly to large, well-known department stores like El Corte Inglès, Galeries Lafayette and Printemps. The type of customer varies from region to region depending on both the prominence of the GUESS? brand in each region and the dominance of a particular type of retail channel in each region. In countries where the brand is well known, we operate through showrooms where agents and distributors can view our line and place orders. We currently have showrooms in key cities such as Barcelona, Düsseldorf, Lugano, Munich, Paris, Lisbon, Florence, Moscow and Warsaw. We sell both our apparel and certain accessories products under our GUESS? and MARCIANO brand concepts through our wholesale channel, operating primarily through two seasons, Spring/Summer and Fall/Winter. Generally, our Spring/Summer sales campaign is from April to September with the related shipments occurring primarily from November to April. The Fall/Winter sales campaign is from November to April with the related shipments occurring primarily from May to October. We may take advantage of early-season demand and potential reorders by offering a pre-collection assortment which ships at the beginning of each season. Customers retain the ability to request early shipment of backlog orders, delay shipments or cancel orders depending on their needs. Revenues from sales to our wholesale licensed stores are also recognized as wholesale sales within our European wholesale operations. During fiscal 2022, our partners opened 19 new licensed retail stores and closed 14 stores, ending the year with 223 licensed retail stores in Europe and the Middle East.
Asia Segment
In our Asia segment, we sell our products through direct-to-consumer and wholesale channels throughout Asia and the Pacific.
Asian Direct-to-Consumer. Our Asian direct-to-consumer network is comprised of brick-and-mortar retail stores and concessions and e-commerce sites.
Retail stores and concessions. Our Asian retail stores and concessions include a mix of directly operated GUESS?, GUESS? Footwear, GUESS? Accessories, GUESS? Kids and MARCIANO stores. During fiscal 2022, we opened six new stores and closed 26 stores, including stores transferred to and from our partners and other store relocations and remodels. We ended the year with 124 directly operated stores in Asia and the Pacific. This store count does not include 99 directly operated apparel and accessory concessions. Concessions are widely used in Asia and generally represent directly managed areas within a department store setting.
e-Commerce. We also have e-commerce sites throughout Asia which operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands.
Asian Wholesale Distribution. Our Asian wholesale customer base is comprised primarily of a small number of selected distributors with which we have contractual distribution arrangements and licensed stores and concessions operated by our wholesale partners. During fiscal 2022, our partners opened 54 new licensed retail stores and closed 17 stores, including stores transferred to and from our partners and other store relocations and remodels. We ended the year with 306 licensed retail stores. This store count does not include 158 apparel and accessory concessions operated by our partners in Asia.
Licensing Segment
Our Licensing segment includes our worldwide licensing operations. The desirability of the GUESS? brand name among consumers has allowed us to selectively expand our product offerings and global markets through trademark licensing arrangements, with minimal capital investment or on-going operating expenses. We currently have various domestic and international licenses that include eyewear, watches, handbags, footwear, kids’ and infants’ apparel, outerwear, undergarments and sleepwear, fragrance, jewelry and other fashion accessories; and include licenses for the design, manufacture and distribution of GUESS? branded products in markets which include Africa, Asia, Australia, Europe, the Middle East, Central America, North America and South America.
Our trademark license agreements customarily provide for a multi-year initial term generally ranging from three to ten years, and may contain options to renew prior to expiration for an additional multi-year period. The typical license agreement requires that the licensee pay us the greater of a royalty based on a percentage of the licensee’s net sales of licensed products or a guaranteed annual minimum royalty that typically increases over the term of the license agreement. In addition, several of our key license agreements provide for specified, fixed cash rights payments over and above our normal, ongoing royalty payments. Generally, licensees are required to spend a percentage of the net sales of licensed products for advertising and promotion of the licensed products and, in many cases, we place the ads on behalf of the licensee and are reimbursed. Additionally, licensees also make contributions to advertising funds, as a percentage of their sales, or may elect to increase their contribution to support specific brand-building initiatives.
In addition, to protect and increase the value of our trademarks, our license agreements include strict quality control and manufacturing standards. Our licensing personnel meet regularly with licensees to ensure consistency with our overall merchandising and design strategies in order to protect the GUESS? trademarks and brand. As part of this process, our licensing department reviews in advance GUESS? third-party licensed products, advertising and promotional materials.
We strategically reposition our existing licensing portfolio by monitoring and evaluating the performance of our licensees worldwide. For instance, between 2005 and 2013, we acquired several of our European apparel licensees. As a result, we now directly manage our adult and children’s apparel businesses in Europe.
Strategic Partnerships
We evaluate opportunities for strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall strategic initiatives and/or will take advantage of economies of scale. Similarly, when existing investments and alliances no longer align with strategic initiatives or as other circumstances warrant, we will evaluate various exit opportunities. As of the date of this Annual Report, we have majority-owned joint ventures in Brazil, the Canary Islands, Mexico, Portugal, Russia and a minority-owned joint venture in South Africa. These joint ventures allow us to accelerate expansion, revitalize certain regions, and provide enhanced development of our retail and wholesale channels in these regions.
Design
Apparel products are designed by in-house design teams that collaborate to share ideas for products that can be sold throughout our global markets and are inspired by our GUESS? heritage. Our design teams seek to identify global fashion trends and interpret them for the style-conscious consumer while retaining the distinctive GUESS? image. They travel throughout the world in order to monitor fashion trends and discover new fabrics. These fabrics, together with the trends observed by our designers, serve as the primary source of inspiration for our lines and collections. In fiscal 2021, we developed our first ever global line of apparel products and in fiscal 2022, we developed our first ever global line across all product categories including accessories. In addition to driving efficiencies, this initiative is expected to help elevate our brand by allowing us to offer products to our customers across all markets from one line while still addressing each local market’s need. We also maintain a fashion library consisting of vintage and contemporary garments as another source of creative concepts. In addition, our design teams work closely with members of our sales, merchandising and retail operations teams to further refine our products to meet the particular needs of our markets.
Global Sourcing and Supply Chain
We source products through numerous suppliers, many of whom have established long-term relationships with us. We seek to achieve efficient and timely delivery of our products, combining global and local sourcing.
Almost all of our products are acquired as full package purchases where we design and source product and the vendor delivers the finished product.
We believe that our balanced global supply chain, with deep vendor partnerships, provides us with a competitive advantage where we have the flexibility to respond to increased demand throughout the world. Our new global apparel line of products will help improve product development costs by reducing the number of styles and help drive efficiencies in product costs by consolidating orders from multiple regions. Our sourcing strategy provides us with the opportunity to leverage costs and improve speed-to-market.
As an ongoing strategic initiative, we leave a larger portion of our buys open prior to each season to improve the efficiency of our speed-to-market by allowing us to design and produce closer to market delivery. This allows us to better react to emerging fashion trends in the market. We are also continuously searching for new suppliers and sourcing opportunities in reaction to the latest trends. We have developed IT systems to capture and share key performance indicators with our partners to drive ongoing improvements. During fiscal 2022, we continued to significantly reduce our vendor base to around 100 suppliers. We also made continued progress on reducing our dependency on sourcing from China and mitigating potential tariff risk without compromising the quality of our products. Additionally, offering an assortment of global products continues to be an area of focus. As a global brand, we maintain skilled sourcing teams in North America, Europe and Asia.
We are committed to sourcing our products in a responsible manner, respecting both the countries in which we conduct business and the business partners that produce our products. Our global supply chain Social Responsibility program reflects our strong commitment to help our suppliers implement best practices in safe and decent work and achieve meaningful improvements in the lives of their workers.
Our program highlights three areas—factory approvals, factory monitoring and remediation, and supplier training and education.
All directly-sourced supplier factories go through a strict approval process before being authorized to work with Guess. To support and ensure our social compliance, we communicate our expectations to our partners through our Global Suppliers Code of Conduct (“Guess CoC”), which sets the minimum requirements for all factories where Guess branded items are manufactured. Although local customs vary in different regions of the world, we believe that the issues of business ethics, human rights, health, safety and environmental stewardship transcend geographical boundaries.
Initial audits assess compliance and allow us to engage and educate new suppliers on our standards and create the groundwork for strong relationships based on continuous improvement. If deficiencies are discovered, personnel in each region are empowered to work with the respective business partner to take a corrective course of action. Additionally, the goal of this process is to educate individuals, build strategic relationships and improve business practices over the long-term.
We also believe in a proactive educational approach, providing many types of training to factory personnel with the aim to increase their awareness of Guess CoC best practices and build compliance capacity.
In addition, we are committed to increased sourcing of environmentally preferred materials as part of our sustainability commitments to reduce reliance on virgin raw materials, support industry innovation and best practices in land use and agriculture, and reduce waste. We are actively engaging our partners to transition to more sustainable materials, as well as to advance production processes through education.
Advertising and Marketing
Our advertising, public relations and marketing strategy is designed to promote a consistent high impact image which endures regardless of changing consumer trends. While our advertising promotes products, the primary emphasis is on brand image.
Since our inception, Paul Marciano, our Chief Creative Officer and Director, has had principal responsibility for the GUESS? brand image and creative vision. Throughout our history, we have maintained a high degree of consistency in our advertisements by using similar themes and images, including our signature black and white print advertisements and iconic logos.
We deploy a variety of media focused on national and international contemporary fashion/beauty, lifestyle and celebrity outlets. In recent years, we have also expanded our efforts into influencer marketing, digital
advertising with leading fashion and lifestyle websites and advertising on social media platforms, including YouTube, Facebook, Instagram, Twitter, Pinterest, Reddit, Snapchat, TikTok and global search engines. Our smartphone applications provide a unique mobile media experience by combining fashion, e-commerce, personalized product recommendations, targeted promotions and social loyalty rewards to drive mobile brand engagement.
We also require our licensees and distributors to invest a percentage of their net sales of licensed products and net purchases of GUESS? products in Company-approved advertising, promotion and marketing. By retaining control over our advertising programs, we are able to maintain the integrity of our brands while realizing substantial cost savings compared to outside agencies.
We will continue to regularly assess and implement marketing initiatives that we believe will build brand equity and grow our business by investing in marketing programs to build awareness and drive customer traffic to our stores, websites and smartphone applications. We plan to further strengthen communications with customers through an emphasis on digital marketing, and through our websites, loyalty programs, direct catalog and marketing mailings. We also plan to strengthen communities on various social media platforms, which enable us to provide timely information in an entertaining fashion to consumers about our history, products, special events, promotions and store locations, while allowing us to receive and respond directly to customer feedback.
As part of these initiatives, we currently have loyalty programs in North America, Europe and Asia covering all of our brands. The programs are designed to reward our members by earning points for purchases that can be redeemed on future purchases either in our stores or online. In addition to earning rewards with the program, our loyalty members may receive other benefits including invitations to special VIP events in our stores, double points during their birthday month and access to seasonal savings, depending on their purchasing tier. Our Guess List loyalty program has experienced growth in its overall member engagement numbers through the introduction of experiential rewards and unique member content. The programs are also used to promote new products to our customers which in turn increases traffic in the stores and online. The loyalty programs generate substantial repeat business that might otherwise go to competing brands. We continue to enhance our loyalty program offerings by understanding our members’ interests and needs by strategically marketing to this large and growing customer base.
Quality Control
Our quality control program is designed to ensure that products meet our high-quality standards. We test the quality of our raw materials prior to production and inspect prototypes of each product before production runs commence. We also perform random in-line quality control checks during and after production before the garments leave the contractor. Final random inspections occur when the garments are received in our distribution centers. We believe that our policy of inspecting our products is important to maintain the quality, consistency and reputation of our products. We have an on-site quality assurance collaboration with an external expert provider for a large portion of our European and North American purchase orders. During fiscal 2022, we continued to expand the program for additional purchase orders in Europe and North America. The objective is to stop product quality issues at the origin before investing in the transportation of the goods to the final destinations.
Product Integrity and Testing Protocol
During fiscal 2022, we published new protocols covering all our major regions, which provide minimum product integrity and other testing for apparel, footwear, accessories and handbags to help ensure our products continue to meet or exceed our customers’ expectations.
Logistics
We utilize distribution centers at strategically located sites. Our U.S. distribution center is based in Louisville, Kentucky, where we use fully integrated and automated distribution systems. The bar code scanning of merchandise and distribution cartons, together with radio frequency communications, provide timely, controlled, accurate and instantaneous updates to our distribution information systems. Distribution of our products in Canada is handled primarily from our operated distribution centers in Montreal, Quebec. In Europe, distribution of our products is handled primarily by third-party distributors through distribution facilities in Italy, the Netherlands and Poland. We also utilize smaller distribution facilities throughout Europe. We utilize several third-party operated distribution warehouses that service the Asia region.
During fiscal 2022, we were impacted by delays due to the logistic disruptions occurring throughout our markets. In an effort to minimize these delays, remain agile and provide flexibility, we utilized several forwarders to avoid congestion and additional delays.
Competition
The apparel industry is highly competitive and fragmented and is subject to rapidly changing consumer demands and preferences. We believe that our success depends in large part upon our ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner and upon the continued appeal to consumers of the GUESS? brand. We compete with numerous apparel retailers, manufacturers and distributors, both domestically and internationally, as well as several well-known designers. Our licensed apparel and accessories also compete with a substantial number of well-known brands. Although the level and nature of competition differs among our product categories and geographic regions, we believe that we differentiate ourselves from our competitors by offering a global lifestyle brand on the basis of our global brand image and wide product assortment comprising both apparel and accessories. We also believe that our geographic diversification, multiple distribution channels and multiple store concepts help to set us apart from our competition.
Information Systems
We believe that high levels of automation and technology are essential to maintain our competitive position and support our strategic objectives. We continue to invest in new technologies and update computer hardware, network infrastructure, system applications and cyber security. Our computer information systems consist of a full range of financial, distribution, merchandising, point-of-sales, customer relationship management, supply chain, digital platform, enterprise resource planning and other systems. During fiscal 2022, we improved and stabilized our digital platforms, implemented more payment methods, redesigned our web front, expanded our shopping channels, enhanced our omni-channel experience and continued to develop mobile-based initiatives to support our wholesale and direct-to-consumer businesses. Other customer-focused initiatives included implementing Wi-Fi in store customer access, shortening card payment processing time, improving mobile point of sale check out, and continuing the implementation of Salesforce Customer 360, endless aisle. We are also continuing to enhance our product life cycle management and supply chain tracking system and to enhance and align our IT standards globally to accommodate future growth and provide operational efficiencies.
Trademarks
We own numerous trademarks, including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, MARCIANO, Question Mark and Triangle Design, a stylized G and a stylized M, GUESS Kids, Baby GUESS, YES, G by GUESS, GbG, GUESS by MARCIANO and Gc. As of January 29, 2022, we had over 5,100 trademarks in the U.S. and internationally registered trademarks or trademark applications pending with the trademark offices in over 175 countries around the world, including the U.S. From time-to-time, we adopt new trademarks in connection with the marketing of our product lines. We consider our trademarks to have significant value in the marketing of our products and act aggressively to register and protect our trademarks worldwide.
Like many well-known brands, our trademarks are subject to infringement. We have staff devoted to the monitoring and aggressive protection of our trademarks worldwide.
Seasonality
Our business is impacted by the general seasonal trends characteristic of the apparel and retail industries. The retail operations in the Americas and Europe are generally stronger during the second half of the fiscal year, and the wholesale operations in the Americas generally experience stronger performance from July through November. The European wholesale businesses operate with two primary selling seasons: the Spring/Summer season, which ships from November to April and the Fall/Winter season, which ships from May to October. We may take advantage of early-season demand and potential reorders in its European wholesale business by offering a pre-collection assortment which ships at the beginning of each season. Customers retain the ability to request early shipment of backlog orders or delay shipment of orders depending on their needs.
Human Capital
Since our founding, we have been a company that welcomes all, both within our own operations and in our supply chain. As of January 29, 2022, with an inclusive culture and a commitment to empowering our people, we provide opportunities for approximately 12,500 associates, both full and part-time, consisting of approximately 4,500 in the U.S. and 8,000 in foreign countries. From our innovative product designers and developers working behind the scenes, to our dynamic retail store associates—and everyone in between—we are committed to making sure their diverse voices are valued, ideas are elevated, and excellence is rewarded.
Celebrating Diversity and Inclusion
Our longstanding commitment to diversity and inclusion comes to life each day as we work together to maintain a fair and inclusive workplace. Our aim is for all GUESS? associates to feel comfortable and safe bringing their whole selves to work and contributing fully to our shared success. Building on the example set by the Marciano brothers and their belief that a diverse organization was a strong and creative one, we have embedded diversity and inclusion principles and practices throughout the Company. Over nearly 40 years, this has created a rich, vibrant culture that respects, and benefits from, different personal attributes, backgrounds, ideas, and perspectives. Today, diversity is a key facet of our company-wide culture, informing our values, recruiting, talent development, and associate advancement, among other operations.
Our expectations of everyone at GUESS? to support a diverse and welcoming workplace are spelled out in the GUESS?, Inc. Code of Ethics. We expect all at GUESS? to promptly report and investigate concerns about possible discrimination, as appropriate, and to facilitate this, we maintain an open-door policy that fosters honest and open communication. GUESS? associates are encouraged to discuss work-related concerns or issues with their manager, department head, Human Resources, or Executive Management without fear of repercussion. In addition, our global whistle-blower hotline allows associates to report concerns about unethical behavior or other potential conflicts.
Cultivating Diversity, Equity, and Belonging through Focused Council
In 2018, we launched our Diversity & Inclusion Council (the “Council”), which is integrated throughout our business. The Council aims to foster a workplace in which employees enjoy a sense of community, belonging, and opportunity for dialogue. The Council also serves as a resource for internal associates, offers guidance on communication and community engagement, and assists with communication with Executive Management and the GUESS?, Inc. Board of Directors.
With the help of the Council, our diversity and inclusion efforts focus on inclusive leadership, employee training, and a work environment that promotes growth and opportunity for all. Initiatives include training for associates and managers, community support, greater diversity in advertising and marketing, celebrations of multicultural and inclusive holidays, and training and compliance programs in our supply chain, among others.
Learning and Development
We are committed to the growth and development of our employees and offer a wide range of training programs for all levels. In addition to receiving ongoing on-the-job training and coaching, our employees can build skills and prepare for the future through our HR training portal. In fiscal 2022, we added new courses and trainings, many of which focus on remote working skills, as well as diversity and inclusion education. We also support learning beyond our walls through tuition assistance. These collective learning and development programs help foster career mobility for our employees, while simultaneously allowing us to fill open positions with existing employees who know our company best.
Employee Safety and Well-Being
We are committed to the safety, health, and overall well-being of each of our employees and their families, providing a wide array of physical, emotional and social support. Our GUESS Wellness 360 online portal offers our employees physical and mental wellness support using challenges, contests, and prizes.
Throughout the COVID-19 pandemic, our priority has been to ensure the safety and well-being of all of our employees, customers, and the communities in which we operate around the world. In this regard, we have implemented new health and safety protocols in our stores, distribution centers, and corporate offices, with several locations offering free COVID-19 testing and vaccinations.
Compensation and Benefits
We are committed to providing competitive compensation and benefits to attract and retain a diverse and talented workforce. We are also committed to maintaining pay equity throughout our organization, conducting annual assessments.We offer a wide array of both employer-paid and employee-paid benefits to support our employees' overall financial, physical, and mental well-being, including, but not limited to, healthcare, retirement savings, paid time off, temporary leave, and flexible work arrangements. We also provide our employees a merchandise discount on most of our products.
Sustainability and Climate Change
In fiscal 2022, we released our latest sustainability report entitled VISION GUESS, our fourth sustainability report covering fiscal 2021 and fiscal 2020, written in accordance with standards of the Global Reporting Initiative (“GRI”) and Sustainable Accounting Standards Board (“SASB”). The publication of VISION GUESS is a milestone achievement for us, marking the successful completion of a reasonable assurance engagement examining the metrics and disclosures in this sustainability report.
The sustainability report shares our significant progress on Environmental, Social, and Governance (ESG) topics since our first sustainability plan launched in 2016. The sustainability report also provides information about our current and future activities which includes, among others, reducing greenhouse gas (“GHG”) emissions with Science Based Targets, transitioning away from virgin polyester to recycled materials, and continuing our commitment to circular fashion.
The VISION GUESS Sustainability report is available at http://sustainability.guess.com. This site provides information on our policies, social impact and environmental programs, as well as our sustainability strategy, data and reporting. The information contained on, or that may be accessed through, our websites is not incorporated by reference into, and is not a part of, this Annual Report.
Strengthening Sustainability Oversight
We are committed to good governance and sustainability oversight at every level, ethics in every business facet, and transparency in sustainability reporting. During fiscal 2022, we further engaged with the Board of Directors on ESG priorities, risks, and opportunities. We continue to ensure all operations and businesses are conducted ethically, both with internal personnel and external business partners, and all of our directors, officers, and associates are held to our Code of Ethics.
Additionally, in the VISION GUESS sustainability plan, we committed to connecting ESG priorities with business performance incentive and evaluation metrics. Our Sustainability and Corporate Social Responsibility Team ensures the environmental and social responsibility is embedded into decision-making processes. In addition, we have implemented a rigorous internal auditing program, covering our sustainability metrics and performance data to ensure complete, accurate, and balanced sustainability reporting. With our continuous effort, fiscal 2021 and fiscal 2020 mark the first time we completed a reasonable assurance examination indicating our sustainability report was prepared in accordance with the GRI and the SASB.
Protecting Our Environment
We are committed to protecting our environment and addressing climate change issues through product responsibility, water stewardship, and GHG emissions reduction. We understand sustainably sourced materials are the key to ensuring product responsibility. Lifecycle analyses have shown that fiber and fabric production make up about half of our apparel’s environmental impact. To that end, we have been working with our vendors to incorporate more sustainable materials and practices. By setting sustainability goals to increase use of responsible materials and promote circular fashion, and by following the GUESS Eco material sourcing guide, we source over 12% sustainable materials across all brands in our global portfolio, and also continue to source a portion of our cotton as Better Cotton.
As part of our commitment to protect our environment, we aim to ensure that animal-derived material used in our products upholds our commitment to the ethical and humane treatment of animals. Through the GUESS Animal Welfare Policy, guided by international best practice in accordance with “The Five Freedoms for Animal Welfare” by the Farm Animal Welfare Council, our suppliers are prohibited from using any fur, mohair, angora,
exotic leather or any other parts from vulnerable, endangered, or wild-caught species. The use of feathers and downs or other animal derived hair is subject to limitation and use with caution.
Historically, denim production factories require the use of many chemicals, which could impact a factory’s wastewater discharge. In fiscal 2019, we established the GUESS Water Action Plan to address each phase of the denim lifecycle to prioritize water savings and improve water quality while providing water education and community engagement. Some of our suppliers have adopted innovative technologies, including Dry Indigo®, a foam for dyeing denim a deep blue without using water and e-flow for reducing water and chemicals in the finishing process. With our commitments in adopting water-saving denim technology and managing environmental impacts in our supply chain, over 20% of our denim meets our GUESS Eco guidelines and approximately 75% of our key laundries completed the Higg Facility Environmental Module (“Higg FEM”) survey.
Our strategy in managing GHG emissions includes meeting our carbon footprint goals and setting Science Based Targets. In fiscal 2021, we achieved our goal from our first sustainability plan of over 15% GHG emissions reduction per square foot from direct operations. We are now pursuing our Science Based Targets for GHG emissions, which were approved by the Science Based Targets Initiative in fiscal 2021. We remain committed to a 50% reduction of absolute Scope 1 and 2 emissions, as well as an ambitious reduction of absolute Scope 3 emissions by 2030. In fiscal 2022, we purchased renewable energy, solar and wind in the Americas, Europe and Asia, equivalent to power approximately 20% of our stores globally. We will continue implementing a variety of energy efficiency and renewable energy strategies and working with our key vendors to make sure they have such plans in place.
Government Regulations
As a company with global operations, we are subject to various federal, state, local and foreign laws, regulations and ordinances. Compliance with these laws, regulations and ordinances has not had, and is not expected to have, a material impact on our earnings, competitive position or capital expenditures.
Website Access to Our Periodic SEC Reports
Our investor website can be found athttp://investors.guess.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act, are available at our investor website, free of charge, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, the charters of our Board of Directors’ Audit, Compensation and Nominating and Governance Committees, as well as the Board of Directors’ Governance Guidelines and our Code of Ethics are posted on our investor website. Printed copies of these documents may also be obtained by writing or telephoning us at: Guess?, Inc., 1444 South Alameda Street, Los Angeles, California 90021, Attention: Investor Relations, (213) 765-5578.
We have included our Internet website addresses throughout this filing as textual references only. The information contained within these websites is not incorporated into this Annual Report on Form 10-K.
ITEM 5. Market1A. Risk Factors.
You should carefully consider the following factors and other information in this Annual Report on Form 10‑K. Additional risks which we do not presently consider material, or of which we are not currently aware, may also have an adverse impact on us. The information discussed below is at the time of this filing. Please also refer to “Important Factors Regarding Forward-Looking Statements” on page (ii) of this Form 10-K.
Risks Related to Operating a Global Business
Our business is global in scope and can be impacted by factors beyond our control.
As a result of our large and growing international operations, we face the possibility of greater losses from risks inherent in doing business in international markets and from factors beyond our control. Such factors that could harm our results of operations and financial condition include, among other things: (i) political instability, war or acts of terrorism, which disrupt trade with the countries where we operate or in which our contractors, suppliers or customers are located; (ii) recessions and volatility in foreign economies, including the economic impact of the ongoing COVID-19 pandemic; (iii) reduced global demand in our industry resulting in the closing of manufacturing facilities; (iv) challenges in managing dispersed foreign operations; (v) local business practices that do not conform to our legal or ethical guidelines; (vi) adoption of additional or revised quotas, restrictions or regulations relating to imports or exports; (vii) additional or increased customs duties, tariffs, taxes and other charges on imports or exports; (viii) anti-American sentiment in foreign countries where we operate resulting from actual or proposed changes to U.S. immigration and travel policies or other factors; (ix) delays in receipts due to our distribution centers as a result of labor unrest, increasing security requirements or other factors at U.S. or other ports; (x) fluctuations in the value of the dollar against foreign currencies; (xi) increased difficulty in protecting our intellectual property rights in foreign jurisdictions; (xii) social, labor, legal or economic instability in the foreign markets in which we do business, which could influence our ability to sell products in, or distribute products from, these international markets; (xiii) restrictions on the transfer of funds between the U.S. and foreign jurisdictions; (xiv) our ability and the ability of our international retail store licensees, distributors and joint venture partners to locate and continue to open desirable new retail locations; and (xv) natural disasters or public health crises in areas in which our contractors, suppliers, or customers are located.
Further, our international presence means we are subject to certain U.S. laws, including the Foreign Corrupt Practices Act, as well as the laws of the foreign countries in which we operate, including data privacy laws. If any of our international operations, or our employees or agents, violates such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results.
Our business may also be affected by new sanctions and export controls targeting Russia and other responses to Russia's invasion of Ukraine.
As a result of Russia's invasion of Ukraine, the United States, the United Kingdom and the European Union governments, among others, have developed coordinated sanctions and export-control measures. Based on the public statements to date, these measures include: (i) comprehensive financial sanctions against major Russian banks; (ii) additional designations of Russian individuals with significant business interests and government connections; (iii) designations of individuals and entities involved in Russian military activities; and (iv) enhanced export controls and trade sanctions targeting Russia's import of various goods. We currently operate in Russia through our wholesale, retail and e-commerce channels and have 70% ownership of a joint venture. We do not have contracts or other relationships with Russian banks, and Russian sales in our wholesale channel are primarily conducted either in cash in advance, with a bank guarantee or with insurance coverage. While we have no direct presence in Ukraine, we operate with a local distributor in Ukraine. Slightly less than 3% of our revenues for Registrant’s Common Equity,fiscal 2022 were generated from sales in these regions. The imposition of enhanced export controls and economic sanctions on transactions with Russia and Russian entities could prevent us from performing existing contracts or pursuing new business opportunities or maintaining adequate insurance coverage to protect our products and facilities. Additionally, the conflict in Ukraine could disrupt the operations of our distributor in that region and surrounding regions. Any of the foregoing could adversely affect our business, supply chain, partners or customers. In addition, the conflict between Russia and Ukraine could lead to disruption, instability and volatility in global markets and industries that could negatively impact our operations. The scope of the impact of sanctions, export controls and the ongoing conflict in Ukraine is impossible to predict at this time, and could have an adverse impact on our business.
Currency fluctuations could adversely impact our financial condition, results of operations and earnings.
Since the majority of our international operations are conducted in currencies other than the U.S. dollar (primarily the British pound, Canadian dollar, Chinese yuan, euro, Japanese yen, Korean won, Mexican peso, Polish zloty, Russian rouble and Turkish lira), currency fluctuations can have a significant impact on the translation of our international revenues and earnings (loss) into U.S. dollars. These amounts could be materially affected by the strengthening of the U.S. dollar, negatively impacting our results of operations, earnings and our ability to generate revenue growth. Furthermore, our products are typically sourced in U.S. dollars and the cost of these products may be affected by changes in the value of the applicable local currencies. Changes in currency exchange rates may also affect the U.S. dollar value of the foreign currency denominated prices at which our international businesses sell products. Our future financial results could be significantly affected by the value of the U.S. dollar in relation to the foreign currencies in which we conduct business, and the speed at which these fluctuations occur. For example, recent sanctions imposed in response to Russia’s invasion of Ukraine, and subsequent downgradings by Fitch and Moody’s of Russia’s sovereign debt to “junk” status, have resulted in record lows of the Russian rouble against the U.S. dollar. If the U.S. dollar strengthens relative to the respective fiscal 2022 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results, as well as our international cash and other balance sheet items during fiscal 2023, particularly in Canada, Europe (primarily the euro, British pound, Turkish lira and Russian rouble) and Mexico.
Although we hedge certain exposures to changes in foreign currency exchange rates, we cannot assure that foreign currency fluctuations will not have a material adverse effect on our financial condition or results of operations. Furthermore, since some of our hedging activities are designed to reduce volatility of fluctuating exchange rates, they not only reduce the negative impact of a stronger U.S. dollar, but they also reduce the positive impact of a weaker U.S. dollar. In addition, while our foreign currency hedges are designed to reduce volatility over the forward contract period, these contracts can create volatility during the period. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities.
Abnormally harsh or unseasonable weather conditions, including as a result of climate change or power outage, could have a material adverse impact on our sales, inventory levels and operating results.
Extreme weather conditions in areas in which our retail stores and wholesale doors are located, particularly in markets where we have a concentration of locations, could adversely affect our business. For example, heavy snowfall, rainfall or other extreme weather conditions, such as hurricanes or deep freezes, might make it difficult for our staff and customers to travel to our stores and thereby reduce our sales and profitability. Our business is also susceptible to unseasonable weather conditions, including conditions resulting from climate change. For example, extended periods of unseasonably warm or prolonged periods of unseasonably cold temperatures during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with those unseasonable conditions. Reduced sales from extreme or prolonged unseasonable weather conditions could have a material adverse effect on our results of operations, financial condition and cash flows.
Our results of operations could be affected by natural events in the locations in which we or our customers or suppliers operate.
Our corporate headquarters, as well as other key operational locations, including retail, distribution and warehousing facilities, are in areas subject to natural events such as severe weather and geological events or public health crises that could disrupt our operations. Many of our suppliers and customers also have operations in these locations. The occurrence of such natural events may result in sudden disruptions in business conditions of the local economies affected, as well as of the regional and global economies. Such disruptions could result in store closures, decreased demand for our products and disruptions in our management functions, sales channels and manufacturing and distribution networks, which could have a material adverse effect on our business, financial condition and results of operations. The ongoing COVID-19 pandemic had a material impact on our financial performance. The pandemic is ongoing and dynamic in nature, including as a result of regional surges, the spread of virus variants and the timing and efficacy of vaccines and other treatments. To date, we have experienced temporary closures in key regions globally, along with other major retailers. In addition, retail stores have experienced significant reductions in traffic and therefore, revenue. The extent and duration of the COVID-19 pandemic remains uncertain and may continue to have significant negative impacts to all aspects of our business and results of operations in future periods, which may materially impact our financial performance. Our business may also be adversely impacted by future epidemics, pandemics or other contagious disease outbreaks, the impacts of which are impossible to predict at this time.
Future changes to U.S. income tax or trade policies impacting multi-national companies could materially affect our financial condition and results of operations.
During fiscal 2022, we sourced most of our finished products with partners and suppliers outside the U.S. and we continued to design and purchase fabrics globally, with most coming from China. In addition, we have increased our sales of product outside of the U.S. In fiscal 2022, approximately 71% of our consolidated net product sales was generated by sales from outside of the U.S. In the long-term, we anticipate these international revenues will continue to grow as a percentage of our total business. The current political landscape has introduced greater uncertainty with respect to future income tax and trade regulations for U.S. companies with significant business and sourcing operations outside the U.S.
The ongoing economic conflict between the U.S. and China has resulted in increased tariffs being imposed on goods we import from China. We have been reducing our dependency on China sourcing, particularly for our U.S. business, and mitigating potential tariffs’ risks without compromising the quality of our products, while improving costs. However, we cannot predict whether, and to what extent, there may be changes to international trade agreements, such as those with China, or whether quotas, duties, tariffs, exchange controls or other restrictions will be changed or imposed by the U.S. or by other countries. If we or our vendors or product licensees are unable to obtain raw materials or finished goods from the countries where we or they wish to purchase them, either because of such regulatory changes or for any other reason, or if the cost of doing so should increase, it could have a material adverse effect on our results of operations and financial condition.
As a result of Russia's invasion of Ukraine, the United States, the United Kingdom and the European Union governments, among others, have developed coordinated sanctions and export-control measures. These sanctions and export-control measures imposed are expected to significantly disrupt our sales in these regions. If the disruptions continue over a prolonged period, our results of operations will be impacted. For further information regarding the risks we face relating to Russia’s invasion of Ukraine, refer to “—Our business may also be affected by new sanctions and export controls targeting Russia and other responses to Russia's invasion of Ukraine.”
Errors in our assumptions, estimates and judgments related to tax matters, including those resulting from regulatory reviews, could adversely affect our financial results.
We are subject to routine tax audits on various tax matters around the world in the ordinary course of business (including income tax, business tax, customs duties, sales and use tax, and value added tax (“VAT”) matters). We regularly assess the adequacy of our uncertain income tax positions and other reserves, which requires a significant amount of judgment. Although we accrue for uncertain income tax positions and other regulatory audits, negotiations with taxing and customs authorities may lead to adjustments in excess of our accruals, resulting in liabilities for additional taxes, duties, penalties and interest. During the quarter ended October 30, 2021, we completed an intra-entity transfer of intellectual property rights from a U.S. entity to a wholly-owned Swiss subsidiary to more closely align our intellectual property rights with our business operations. The transactions resulted in a U.S. income tax expense that was substantially offset by the recognition of a deferred income tax asset in the Swiss subsidiary. We cannot be certain that this transfer will not lead to any unanticipated income tax consequences which could harm our financial results. In addition, the income tax impact to us in connection with an intra-entity intellectual property transfer depends on the fair value determination of the intellectual property rights which determination requires management to make significant estimates and to apply complex tax regulations in multiple jurisdictions. Tax authorities may challenge our fair value determinations which could adversely impact the income tax benefits we expect to realize as a result of the transfer. Refer to “Part IV. Financial Statements – Note 12 – Income Taxes” in this Form 10-K for disclosures about our income tax matters, including reserves for uncertain tax positions.
From time-to-time, we make VAT and other tax-related refund claims with various foreign tax authorities that are audited by those authorities for compliance. Failure by these authorities to approve or ultimately pay these claims could have a material adverse effect on our results of operations and liquidity.
Changes in income tax laws, significant shifts in the relative source of our earnings, or other unanticipated income tax liabilities could adversely affect our effective income tax rate and profitability and may result in volatility in our financial results.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Income tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change. We record income tax expense based on our estimate of future payments, which includes reserves for uncertain tax positions in multiple
tax jurisdictions and requires significant judgment in evaluating and estimating our provision and accruals. Our effective income tax rate in the future could be affected by a number of other factors, including: the outcome of income tax audits in various jurisdictions, changes in our stock price, the resolution of uncertain tax positions and changes in our operating structure. We and our subsidiaries are engaged in intercompany transactions across multiple tax jurisdictions. Although we believe these transactions reflect arm’s length terms and the proper transfer pricing documentation is in place, these transfer pricing terms and conditions may be scrutinized by local tax authorities during an audit and any resulting changes may impact our mix of earnings in countries with differing statutory tax rates. In addition, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, as well as losses in jurisdictions where we are unable to realize the related tax benefits, can create volatility in our effective income tax rate. In particular, the income tax benefits associated with our transfer of intellectual property to our wholly-owned Swiss subsidiary during the quarter ended October 30, 2021 are sensitive to future profitability and taxable income in Switzerland, audit assessments and changes in applicable tax law. Any one of these factors could adversely impact our income tax rate and our profitability and could create ongoing variability in our quarterly or annual tax rates.
The Organization for Economic Co-operation and Development (OECD), an international association comprised of 36 countries, including the United States, has made changes to numerous long-standing income tax principles. There can be no assurance that these changes, once adopted by countries, will not have an adverse impact on our provision for income taxes.
Risks Related Stockholder Mattersto our Business Strategy
If we fail to successfully execute growth initiatives, including acquisitions and Issueralliances, our business and results of operations could be harmed.
We regularly evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives.
These efforts place increased demands on our managerial, operational and administrative resources that could prevent or delay the successful opening of new stores and the identification of suitable licensee partners, adversely impact the performance of our existing stores and adversely impact our overall results of operations. In addition, acquired businesses and additional store openings may not provide us with increased business opportunities as consumer preferences for in-person shopping has shifted to online shopping due to the COVID-19 pandemic, or result in the growth we anticipate, particularly during economic downturns. Furthermore, integrating acquired operations (including existing licensees or joint venture partners) is a complex, time-consuming and expensive process. Failing to acquire and successfully integrate complementary businesses, or to achieve the business synergies or other anticipated benefits of acquisitions or joint ventures, could materially adversely affect our business and results of operations.
We may be unsuccessful in implementing our plans to open and operate new stores, which could harm our business and negatively affect our results of operations.
New store openings have historically been an important part of the growth of our business. To open and operate new stores successfully, we must: (i) identify desirable locations, the availability of which is out of our control; (ii) negotiate acceptable lease terms, including desired tenant improvement allowances; (iii) efficiently build and equip the new stores; (iv) source sufficient levels of inventory to meet the needs of the new stores; (v) hire, train and retain competent store personnel; (vi) successfully integrate the new stores into our existing systems and operations; and (vii) satisfy the fashion preferences of customers in the new geographic areas.
Any of these challenges could delay our store openings, prevent us from completing our store opening plans or hinder the operations of stores we open. These challenges could be even more pronounced in foreign markets due to unfamiliar local regulations, business conditions and other factors. Once open, we cannot be sure that our new stores will be profitable. Unfavorable economic and business conditions and changing consumer preferences could also interfere with our store opening plans.
Failure to successfully develop and manage new store design concepts could adversely affect our business.
The introduction and growth or maintenance of new store design concepts as part of our growth and productivity strategies could strain our financial and management resources and is subject to a number of other risks, including customer acceptance, product differentiation, competition and maintaining desirable locations. These risks may be compounded during difficult economic climates or future economic downturn. There can be
no assurance that new store designs will achieve or maintain sales and profitability levels that justify the required investments. If we are unable to successfully develop new store designs, or if consumers are not receptive to the products, design layout, or visual merchandising, our results of operations and financial results could be adversely affected. In addition, the failure of new store designs to achieve acceptable results could lead to unplanned store closures and/or impairment and other charges, which could adversely affect our results of operations and growth.
We may not fully realize expected cost savings and/or operating efficiencies related to cost-saving initiatives.
We have identified several areas that present opportunities for future cost savings and efficiencies, including improved working capital management, distribution, systems integration and development, supply chain, retail store rent relief efforts, store closure opportunities, and other initiatives, based on a number of assumptions and expectations which, if achieved, would improve profitability and cash flows from operating activities. However, there can be no assurance the expected results will be achieved. These and any future spend reductions, if any, may also negatively impact other initiatives or efforts to grow our business, which may negatively impact future results of operations and increase the burden on existing management, systems and resources. In addition, these cost savings may be negated or offset by unexpected or increased costs and poorer performance in other areas of the business.
Risks Related to Macroeconomic Conditions
The COVID-19 pandemic has had, and may continue to have, adverse effects on our financial condition and results of operations, and other similar pandemics could also adversely affect our business.
Our business has been, and may continue to be, materially adversely affected by the COVID-19 pandemic (including new variants of the virus). In connection with the COVID-19 pandemic, we have experienced disruptions and restrictions on travel, temporary closures of our stores, office buildings and the facilities of our wholesale customers or suppliers, labor shortages, disruptions in shipments and negative impacts to pricing of certain product components. The COVID-19 pandemic has also adversely affected the economies and financial markets of many countries, the extent and duration of which is unclear at this time.
The impacts of the COVID-19 pandemic have been broad reaching, including impacts to our retail, wholesale and licensing businesses. The pandemic has impacted our business globally, with significant temporary store closures and materially lower traffic at open stores, especially during periods of surges in COVID-19 outbreaks in geographies where our stores are located. The COVID-19 pandemic has also impacted, and is expected to continue to impact, the Asia region, which is the source of most of our goods. Temporary factory closures and the pace of workers returning to work could further impact our suppliers’ ability to source raw materials and to timely produce and fulfill finished goods orders. We have also experienced modest impacts on delays in deliveries, driven primarily by factory labor shortages and port congestion. The ability of our distribution and logistics providers to operate may be further impacted depending on the continued severity and duration of the COVID-19 pandemic and may have a significant impact on the cost and timing of receipts for future seasons. The occurrence of any of these events could further negatively impact our future consolidated financial position, results of operations and cash flows.
The extent of the impact of the COVID-19 pandemic will depend largely on future developments, including the duration of the outbreak and the occurrence of additional waves of infections in the United States and globally, the extent of any economic recession resulting from the pandemic, the effectiveness and speed of vaccination distribution, the related impacts on consumer confidence and spending, potential future government restrictions on retail operations and the willingness of customers to visit malls and shopping centers, the willingness of employees to staff our stores and fulfillment centers, and when, or if, we will be able to resume normal operations, all of which are highly uncertain and cannot be predicted. There could be a prolonged impact on our business due to slow economic recovery or changes in consumer behavior. We currently anticipate that we will be able to satisfy our ongoing cash requirements during the next 12 months primarily with cash flow from operations and existing cash balances as supplemented by borrowings under our existing Credit Facilities. However, if we have sustained decrease in consumer demand related to the COVID-19 pandemic, we may require access to additional credit. There is no guarantee we will be able to obtain additional credit or extend or refinance our existing borrowing agreements. The results for the first quarter of fiscal 2023, as well as full fiscal 2023, could also be impacted by the COVID-19 pandemic in ways we cannot predict today, including, but not limited to, non-cash write-downs and asset impairment charges (including impairments on property and equipment, operating lease
right-of use assets and goodwill); unrealized gains or losses related to investments; foreign currency fluctuations; and collections of accounts receivables.
Our business may also be impacted by future outbreaks of other contagious diseases, which could cause similar disruptions in our business, and may impact our operations in ways that are impossible to predict at this time.
Slowing customer traffic in malls or outlet centers could significantly reduce our sales, increase pressure on our margins and leave us with excess inventory.
Unfavorable economic conditions, changing shopping patterns, including significant increases in e-commerce sales, which have accelerated during the COVID-19 pandemic, changing demographic patterns and other factors have adversely affected customer traffic in mall and outlet centers. This, in turn, has resulted in significant pricing pressures and a highly promotional retail environment in the apparel sector. Should these trends continue or worsen, or should we fail to effectively market our products in these conditions, it could negatively impact our sales, increase pressure on our margins, leave us with excess inventory, cause a decline in profits and negatively impact our liquidity.
Failure to successfully develop an omnichannel shopping experience could have a material adverse impact on our business.
As e-commerce sales continue to grow and evolve, our customers increasingly interact with us through a variety of media including smart phones and tablets, and expect seamless integration across all touchpoints. Our success depends on our ability to respond to shifting consumer traffic patterns and ability to engage our customers.
While we must keep up to date with emerging technology trends in the retail environment in order to develop a successful omnichannel shopping experience, it is possible these initiatives may not prove to be successful, may increase our costs, may not succeed in driving sales or attracting customers and could result in significant investments that do not provide the anticipated benefits or desired rates of return.
In addition, digital operations are subject to numerous risks, including reliance on third-party computer hardware and software and service providers, data breaches, violations of state, federal or international laws, including those relating to online privacy, credit card fraud, telecommunication failures and electronic break-ins and similar disruptions, and disruption of internet service. Changes in U.S. or foreign regulations may also negatively impact our ability to deliver product to our customers. Failure to successfully respond to these risks may adversely affect sales as well as damage the reputation of our brands.
Poor or uncertain economic conditions, and the resulting negative impact on consumer confidence and spending, have had and could in the future have an adverse effect on our business.
The apparel industry is cyclical in nature and is particularly affected by adverse trends in the general economy. Purchases of Equity Securities.apparel and related merchandise are generally discretionary and, therefore, tend to decline during periods of economic uncertainty and recession, but may also decline at other times. Over the last several years, volatile economic conditions and uncertain market conditions in many markets around the world have resulted in cautious consumer spending. For example, a number of European countries experienced difficult economic conditions, including sovereign debt issues that negatively impacted the capital markets. These conditions resulted in reduced consumer confidence and spending in many countries in Europe, particularly Southern Europe. While these conditions have improved, if conditions in Europe, or other economic regions in which we do business, worsen or fail to further improve, there will likely be a negative impact on our business, prospects, operating results, financial condition and cash flows.
There are a number of other factors that could contribute to reduced levels of consumer spending, such as increases in interest rates, currency fluctuations, inflation, unemployment, consumer debt levels, inclement weather, tax, net worth reductions based on market declines or uncertainty, energy prices and austerity measures. Similarly, natural disasters, labor unrest, actual or potential terrorist acts, public health crises, including the COVID-19 pandemic or other similar pandemics, global trade, immigration policies, geopolitical unrest and other conflicts can also create significant instability and uncertainty in the world, causing consumers to defer purchases and travel, or prevent suppliers and service providers from providing required services or materials to us. These or other factors could materially and adversely affect our business, prospects, operating results, financial condition and cash flows.
Significant fluctuations and volatility in the price of various input costs, including, but not limited to, cotton and oil-related materials, utilities, fuel, freight and wages may have a material adverse effect on our business, results of operations, financial condition and cash flows.
Inflation can have a long-term impact on us because increasing input costs may impact our ability to maintain satisfactory margins. For example, we have recently experienced significant inflation in labor, materials and shipping costs. The cost of the materials that are used in our manufacturing process, such as oil-related commodity prices and other raw materials, including cotton, dyes and chemicals, and other costs, such as fuel, energy and utility costs, can fluctuate as a result of inflation, the current situation in Russia and other factors. Similarly, a significant portion of our products are manufactured in other countries and declines in the value of the U.S. dollar may result in higher manufacturing costs. In addition, sudden decreases in the costs for materials may result in the cost of inventory exceeding the cost of new production, which could result in lower profitability, particularly if these decreases result in downward price pressure. If, in the future we incur volatility in the costs for materials, labor and freight that we are unable to offset through price adjustments or improved efficiencies, or if our competitors’ unwillingness to follow our price changes results in downward price pressure, our business, results of operations, financial condition and cash flows may be adversely affected.
Fluctuations in the price or availability of quality raw materials and commodities could increase costs and negatively impact profitability.
The raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high demand for fabrics, currency fluctuations, crop yields, weather patterns, climate change, supply conditions, government regulations (including tariffs), labor conditions, energy costs, transportation or freight costs, economic climate, public health crises, market speculation and other unpredictable factors. Negative trends in any of these conditions or our inability to appropriately project fabric requirements could increase costs and negatively impact profitability.
Risks Related to Brand Reputation, Relevance and Protection
Demand for our merchandise may decrease and the appeal of our brand image may diminish if we fail to identify and rapidly respond to consumers’ fashion tastes.
The apparel industry is subject to rapidly evolving fashion trends and shifting consumer demands. Accordingly, our brand image and profitability are heavily dependent upon the priority our customers place on fashion and our ability to anticipate, identify and capitalize upon emerging fashion trends. If we fail to anticipate, identify or react appropriately, or in a timely manner, to fashion trends (including as a result of our recent shift to a single global line of apparel), we could experience reduced consumer appeal and a diminished brand image. These factors could result in higher wholesale markdowns, lower average unit retail prices, lower product margins and decreased sales volumes and could have a material adverse effect on our results of operations and financial condition.
Our inability to protect our reputation could have a material adverse effect on our brand.
Our ability to maintain our reputation is critical. Our reputation could be jeopardized if we or our third-party providers fail to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure by us or our third-party providers to comply with ethical, social, product, labor, health and safety or environmental standards could also jeopardize our reputation and potentially lead to adverse consumer actions, including boycotts. They could also impact investment decisions by investors, including some large institutional investors and funds, which could negatively impact our stock price. With the increased proliferation of social media, public perception about products, business practices, stores or brand, whether justified or not, could impair our reputation, involve us in litigation, damage our brand and have a material adverse effect on our business. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations and financial condition, as well as require additional resources to rebuild our reputation.
We depend on our intellectual property, and our methods of protecting it may not be adequate.
Our success and competitive position depend significantly upon our trademarks and other proprietary rights. We take steps to establish and protect our trademarks worldwide. Any precautions we may take to protect our intellectual property, policing unauthorized use of our intellectual property is difficult, expensive and time consuming. We may be unable to adequately protect our intellectual property or to determine the extent of any unauthorized use, particularly in those foreign countries where the laws do not protect proprietary rights as fully as in the U.S. We also place significant value on our trade dress and the overall appearance and image of our products. However, we cannot assure that we can prevent imitation of our products by others or prevent others from seeking to block sales of GUESS? products for purported violations of their trademarks and proprietary rights. We also cannot assure that others will not assert rights in, or ownership of, trademarks and other proprietary rights of GUESS?, our proprietary rights would be upheld if challenged or we would, in that event, not be prevented from using our trademarks, any of which could have a material adverse effect on our financial condition and results of operations. Further, we could incur substantial costs in legal actions relating to our use of intellectual property or the use of our intellectual property by others.
Failure to appropriately address emerging environmental, social and governance matters could have a material adverse impact on our reputation and, as a result, our business.
There is an increased focus from investors, customers, associates, business partners and other stakeholders concerning environmental, social and governance matters.
The expectations related to environmental, social and governance matters are rapidly evolving, and we announce initiatives and goals related to environmental, social and governance matters from time to time. We could fail, or be perceived to fail, to act responsibly in our environmental, social and governance efforts, or we could fail in accurately reporting our progress on such initiatives and goals. In addition, we could be criticized for the scope of such initiatives or goals. As a result, we could suffer negative publicity and our reputation could be adversely impacted, which in turn could have a negative impact on investor perception and our products’ acceptance by consumers. This may also impact our ability to attract and retain talent to compete in the marketplace.
Risks Related to Third Party Relationships
Since August 8, 1996,we do not control our licensees’ actions and we depend on our licensees for a substantial portion of our earnings from operations, their conduct could harm our business.
We license to others the Company’srights to produce and market certain products sold with our trademarks. While we retain significant control over our licensees’ products and advertising, we rely on our licensees for, among other things, operational and financial control over their businesses. If the quality, focus, image or distribution of our licensed products diminish, consumer acceptance of and demand for our brands and products could decline. This could materially and adversely affect our business and results of operations.
In fiscal 2022, approximately 75% of our net royalties were derived from our top five licensed product lines. A decrease in customer demand for any of these product lines could have a material adverse effect on our results of operations and financial condition. In addition, purchases from our top two licensees in fiscal 2022 accounted for almost 20% of our total inventory purchases. Although we believe we could replace existing licensees if necessary, we may have a negative impact during the transition period. Our inability to replace existing licensees could adversely affect our revenues and results of operations.
Our success depends on the strength of our relationships with our suppliers and manufacturers.
The majority of our finished goods are sourced from partners and suppliers located in over 30 countries outside the U.S. In fiscal 2022, over one third of these products were sourced from partners and suppliers based in China. Our two largest suppliers, which were licensee partners, accounted for approximately 20% of our purchases of finished goods in fiscal 2022.
We do not own or operate production facilities, and we depend on independent factories to supply fabric and manufacture products to our specifications. We do not have long-term contracts with any suppliers or manufacturers, and our business is dependent on our partnerships with our vendors. If manufacturing costs rise significantly, our product margins and results of operations could be negatively affected. In addition, few of our vendors manufacture our products exclusively. As a result, we compete with other companies for the production capacity of independent contractors. If our vendors fail to ship our fabrics or products on time or to meet our
quality standards or are unable to fill our orders, we might not be able to deliver products to our retail stores and wholesale customers on time or at all.
Moreover, our suppliers have at times been unable to deliver finished products in a timely fashion. This has led, from time-to-time, to an increase in our inventory, creating potential markdowns and a resulting decrease in our profitability. As there are a finite number of skilled manufacturers that meet our requirements, it could take significant time to identify and qualify suitable alternatives, which could result in our missing retailing seasons or our wholesale customers canceling orders, refusing to accept deliveries or requiring we lower selling prices. Since we prefer not to return merchandise to our manufacturers, we could also have a considerable amount of unsold merchandise. Any of these problems could harm our financial condition and results of operations.
Risks Related to Data Privacy and Cybersecurity
A data privacy breach or failure to comply with confidentiality and data privacy obligations could damage our reputation and customer relationships, expose us to litigation risk and potential fines and adversely affect our business.
As part of our normal operations, we collect, process, transmit and where appropriate, retain certain sensitive and confidential employee and customer information, including credit card information. There is significant concern by consumers and employees over the security of personal information, consumer identity theft and user privacy. Despite the security measures in place, our facilities and systems, and those of our third-party service providers, are vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. As a result of recent security breaches at a number of prominent retailers and other large institutions, the media and public scrutiny of information security and privacy has become more intense and the regulatory environment has become more stringent. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer or employee information, whether by us or our vendors, could result in significant legal and remediation expenses, severely damage our reputation and our customer relationships, harm sales, expose us to risks of litigation and liability and result in a material adverse effect on our business, financial condition and results of operations. Additionally, changing privacy laws in the United States, Europe and elsewhere, including the adoption by the European Union of the General Data Protection Regulation (“GDPR”), which became effective May 2018, created individual privacy rights and imposed increased obligations on companies handling personal data. Consequently, we may incur significant costs related to complying with laws regarding the protection and unauthorized disclosure of personal information. A failure to comply with the stringent rules of the GDPR or state privacy laws could result in material fines.
Our business could suffer if our computer systems and websites are disrupted or cease to operate effectively.
The efficient operation of our business is very dependent on our computer and information systems. We rely heavily on our merchandise management and ERP systems used to track sales and inventory and manage our supply chain. In addition, we have e-commerce and other Internet websites worldwide. Given the complexity of our business it is imperative that we maintain constant operation of our computer hardware and software systems. Despite our preventative efforts, our systems are vulnerable to damage or interruption from, among other things, ineffective upgrades, ineffective support from third-party vendors, difficulties in replacing or integrating new systems, security breaches, computer viruses, natural disasters and power outages. Any such problems or interruptions could result in incorrect information being supplied to management, inefficient ordering and replenishment of products, loss of orders, significant expenditures, disruption of our operations, inability to produce accurate financial statements, improper access to or disclosure of personally identifiable or proprietary information and other adverse impacts to our business. While we do experience damage or interruption to our systems, such events have not in the past had a material adverse impact on our business, financial condition or results of operations. It is possible, however, that future events resulting in damage or interruption to our systems could materially adversely impact our business, financial condition or results of operations.
Risks Related to Competition
The apparel industry is highly competitive, and we may face difficulties competing successfully in the future.
We operate in a highly competitive and fragmented industry with low barriers to entry. We compete with many apparel manufacturers and distributors, both domestically and internationally, as well as many well-known designers. We, along with our licensees, compete with many other designers and retailers (both brick and mortar and e-commerce sites), including department stores, some of whom are our major wholesale customers. Global and regional branded competitor companies pose significant challenges to our market share in our existing major domestic and foreign markets and to our ability to successfully develop new markets. Some of our competitors have advantages over us, including greater financial and marketing resources, higher wage rates, lower prices, more desirable store locations, greater online and e-commerce presence and faster speed-to-market. In addition, our larger competitors may be better equipped to adapt to changing conditions affecting the competitive market and newer competitors may be viewed as more desirable by consumers. Also, in most countries, the industry’s low barriers to entry allow the introduction of new products or new competitors at a fast pace. In other countries, high import duties may favor locally produced products. Any of these factors could result in reductions in sales or prices and could have a material adverse effect on our results of operations and financial condition.
Our Americas Wholesale business is highly concentrated. If any large customers decreases its purchases or experiences financial difficulties, our results of operations and financial condition could be adversely affected.
In fiscal 2022, our two largest wholesale customers accounted for a total of approximately 3.9% of our consolidated net revenue. Continued consolidation in the retail industry could further decrease the number of, or concentrate the ownership of, stores that carry our products and our licensees’ products. In recent years, there has been a significant increase in the number of designer brands seeking placement in department stores, which makes any one brand potentially less attractive to department stores. If any one of our major wholesale customers decides to decrease purchases from us, to stop carrying our products or to carry our products on less favorable terms, our sales and profitability could significantly decrease. Similarly, some retailers have recently experienced significant financial difficulties, which in some cases have resulted in bankruptcy, liquidation and store closures. Financial difficulties of one of our major customers could result in reduced business and higher credit risk with respect to that customer. Any of these circumstances could ultimately have a material adverse effect on our results of operations and financial condition.
Risks Related to Legal, Governmental and Regulatory Matters
Proxy contests or other activist investor actions threatened or commenced against us could cause the Company to incur substantial costs, divert management’s attention and resources, cause uncertainty about the strategic direction of our business and adversely affect our business, operating results and financial condition.
In connection with the 2022 annual meeting of our shareholders (the “2022 Annual Meeting”), Legion Partners Holdings, LLC, together with its affiliates (collectively, “Legion Partners”), is conducting a “vote no” campaign against the reelection of two of the directors expected to be recommended by our Board of Directors. Such actions, including, without limitation, the “vote no” campaign and related activities pursued by Legion Partners, or if other activist investors in the future pursue and maintain a proxy contest or related actions at an annual meeting of shareholders or otherwise take actions that conflict with our strategic direction, could have a material adverse effect on us for the following reasons:
•Activist investors may attempt to effect changes in how we are governed and our strategic direction, or to acquire control over the Company. In particular, activist investors may suggest changes to our operations, including management, that conflict with our strategic direction and could cause uncertainty amongst employees, customers and our investors about the strategic direction of our business.
•Responding to proxy contests or other actions, including Legion Partners’ “vote no” campaign, could disrupt our operations, be costly and time-consuming, and divert the attention of our Board of Directors, senior management and employees away from their regular duties and the pursuit of business strategies. In addition, we may choose to initiate, or may become subject to, litigation as a result of a proxy contest or matters arising from a proxy contest or other activist investor actions, which would serve as a further distraction to our Board of Directors, senior management and employees and could require us to incur significant additional costs.
•Perceived uncertainties as to our future direction as a result of potential changes to the composition of the Board of Directors may lead to the perception of a change in the direction of the business, instability or lack of continuity, which may be exploited by our competitors, may cause concern to our current or potential customers and employees, may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners.
•Proxy contests and related actions, including Legion Partners’ “vote no” campaign, could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
•Legion Partners’ “vote no” campaign may cause Company director candidates who fail to receive sufficient votes for election or reelection to tender resignations to the Board of Directors, which may, in its discretion, decide to accept such resignations.
Violation of laws or regulations, or changes to existing laws or regulations could adversely affect our business, reputation and results of operations.
We are subject to numerous laws and regulations at the state, federal and international levels, including, but not limited to, the areas of health care, data privacy, taxes, transportation and logistics, the environment, trade, conflict minerals, product safety, employment and labor, advertising and pricing practices, consumer protection, e-commerce, anti-competition, anti-corruption, including the federal Foreign Corrupt Practices Act, and intellectual property. Compliance with these numerous laws and regulations is complicated, time consuming and expensive. In addition, the laws may be inconsistent from jurisdiction to jurisdiction and are subject to change from time to time, sometimes unexpectedly. Failure to comply or to effectively anticipate changes in such laws or regulations could have a material adverse effect on our business, reputation and results of operations.
Violation of labor, environmental and other laws by our licensees or suppliers could harm our business.
We require our licensing partners and suppliers to operate in compliance with applicable laws and regulations. While our internal and vendor operating guidelines, code of conduct and monitoring programs promote ethical business practices and compliance with laws, we do not control our licensees or suppliers or their labor, environmental, safety or other business practices. A violation of law by any of our licensees or suppliers, or divergence of a licensee’s or supplier’s business practices or social responsibility standards from ours or those generally accepted as ethical in the U.S., could disrupt the shipment of our products, harm the value of our trademarks, damage our reputation or expose us to potential liability.
Additionally, in many jurisdictions in which we operate, governmental bodies are enacting new or additional legislation and regulations to reduce or mitigate the potential impacts of climate change. If we, our suppliers, or our contract manufacturers are required to comply with these laws and regulations, or if we choose to take voluntary steps to reduce or mitigate our impact on climate change, we may experience increased costs for energy, production, transportation, and raw materials, increased capital expenditures, or increased insurance premiums and deductibles, which could adversely impact our operations. Inconsistency of legislation and regulations among jurisdictions may also affect the costs of compliance with such laws and regulations. Any assessment of the potential impact of future climate change legislation, regulations or industry standards, as well as any international treaties and accords, is uncertain given the wide scope of potential regulatory change in the countries in which we operate.
We are subject to periodic litigation and other regulatory proceedings, which could result in unexpected obligations, as well as the diversion of time and resources.
We are involved from time-to-time in various U.S. and foreign lawsuits relating to our business, including purported class action lawsuits, employment claims and intellectual property claims. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such new or existing proceedings. Should management’s evaluation of any such claims or proceedings or the likelihood of any future claims or proceedings prove incorrect, our exposure could materially exceed expectations, adversely impacting our business, financial condition and results of operations. In addition, any significant litigation or regulatory matters, regardless of the merits, could divert management’s attention from our operations and result in substantial legal fees. Refer to “Part IV. Financial Statements – Note 15 – Commitments and Contingencies” in this Form 10-K for disclosures about our legal and other proceedings.
Risks Related to Inventory, Human Capital and Supply Chain Management
Our failure to retain our existing senior management team or to retain or attract other key personnel could adversely affect our business.
Our future performance depends to a significant degree upon the continued contributions of our key personnel, including our senior management and board members. Our business requires disciplined execution at all levels of our organization in order to ensure the timely delivery of desirable merchandise in appropriate quantities to our stores and other customers. This execution requires experienced and talented management in various areas of our business. Our success depends upon the personal efforts and abilities of our key personnel and senior management, particularly Carlos Alberini, Chief Executive Officer, and founding board member and Chief Creative Officer Paul Marciano. Although we believe we have a strong management team with relevant industry expertise, the extended loss of the services of these or other key personnel could materially harm our business. If Messrs. Alberini and Marciano were unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. As such, any disruption in the services of our key personnel could significantly disrupt our operations and prevent the timely achievement of our development strategies and growth, which could have an adverse effect on our financial condition, operating results and prospects. These changes could also increase the volatility of our stock price.
The market for qualified employees in the apparel and retail industries is highly competitive, and competitors may use aggressive tactics to recruit our key personnel. This competition has become exacerbated by the increase in employee resignations currently taking place throughout the U.S. as a result of the coronavirus pandemic, which is commonly referred to as the “Great Resignation.” Our success depends upon our ability to attract, retain and motivate qualified employees and upon the continued contributions of these individuals. We cannot provide assurances that we will be successful in attracting and retaining qualified employees in future periods without our key personnel. Competition for personnel is intense, and the loss of services of one or more of these individuals, or the negative public perception with respect to the loss of one or more of these individuals, could have an adverse effect on our business. The continued presence of Messrs. Alberini and Marciano is necessary to facilitate continuity in any succession planning, and without these individuals, we may not be successful in finding and integrating suitable successors.
Increases in labor costs, including wages, could adversely impact our operational results, financial condition and results of operations.
Our retail store and distribution and fulfillment center operations are subject to laws governing such matters as minimum wages, working conditions and overtime pay. As minimum wage rates increase or related laws and regulations change, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly or salaried employees. We have experienced and may continue to experience increased employee turnover as a result of the ongoing “Great Resignation,” which has led to wage rate increases in certain geographies. Any increase in the cost of our labor could have an adverse effect on our operating results, financial condition and results of operations. In addition, wage actions by other retailers may require us to increase wage rates in order to attract and retain talented employees. Persisting labor shortages, increased employee turnover or our inability to successfully implement our expanded format store strategy could also increase our labor costs. This in turn could lead us to increase prices, which could adversely impact our sales. We are also subject to risks related to other store and distribution and fulfillment center expenses and operational costs. Conversely, if competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline.
Our failure to shorten lead-times or to anticipate consumer demand, failure of our international vendors to supply quality products on a timely basis, failure of our merchandising strategies or failure to open new and remodel existing stores on schedule could result in excess inventory.
Although we have shortened lead-times for the design, production and development of a portion of our product lines, we expect to continue to place orders with our vendors for most of our products a season or more in advance. If we are unsuccessful in continuing to shorten lead-times or if we fail to anticipate fashion trends or consumer demand, we could have excess inventories. Additionally, our vendors could fail to timely supply the quality products and materials we require. Moreover, we could fail to effectively market or merchandise products once we receive them. We could fail to open new or remodeled stores on schedule, and inventory purchases made in anticipation of store openings could remain unsold. If we experience excess inventories including from
temporary store closures, wholesale order cancellations and reduced consumer demand from the COVID-19 pandemic, we could incur inventory write-downs and markdowns, which in turn could have a material adverse effect on our results of operations and financial condition.
Failure to deliver merchandise timely to our distribution facilities, stores or wholesale customers could disrupt our business.
The efficient operation of our global retail and wholesale businesses depends on the timely importation, customs clearance, and receipt of merchandise to and from distribution centers and our ability to efficiently process such merchandise. We receive merchandise at our distribution facilities and deliver merchandise to our stores and wholesale customers using independent third parties who import as well as transport goods. The independent third parties and entities on which they rely have employees which may be represented by labor unions. Disruptions in the delivery of merchandise caused by importation delays or work stoppages by employees or contractors of any of these third parties could delay the timely receipt of merchandise. Any failure by a third-party to respond adequately to our distribution needs could disrupt our business.
A disruption at our distribution facilities could have a material adverse impact on our sales and operating results.
Our U.S. business relies primarily on a single distribution center located in Louisville, Kentucky to receive, store and distribute merchandise to our U.S. retail stores, wholesale customers and e-commerce customers. Distribution of our products in Canada is handled primarily from two distribution centers in Montreal, Quebec. In Asia, we utilize several third-party operated distribution warehouses that service the Asia region. In Europe, distribution of our products is handled primarily by third-party distributors through a distribution facility in Venlo, Netherlands. We continue to optimize our logistic network in Europe.
Any significant interruption in the operation of any of our distribution centers due to natural events (including public health crises), weather conditions, accidents, system failures, capacity issues, labor issues, relationships with our third-party warehouse operators or landlords, failure to successfully complete or delays in optimizing our logistics network, new providers, and/or new distribution systems or other unforeseen causes could have a material adverse effect on our ability to efficiently manage the volume and/or costs associated with the distribution of our products without encountering shipment delays or wholesale order cancellations. Such events could negatively impact our sales, inventory positions, operating results and customer relations.
Risks Related to Credit, Indebtedness and Investment in our Stock
We may be unable to raise the funds necessary to repurchase our $300 million 2.0% convertible senior notes due 2024 (the “Notes”) for cash following a fundamental change, or to pay any cash amounts due upon conversion, and our other indebtedness may limit our ability to repurchase the Notes or pay cash upon their conversion.
Noteholders may require us to repurchase their Notes following a fundamental change at a cash repurchase price generally equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion, we will satisfy part or all of our conversion obligation in cash unless we elect to settle conversions solely in shares of our common stock. We will be required to repay the Notes in cash at their maturity, unless earlier converted or repurchased. We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the Notes or pay the cash amounts due upon conversion. In addition, applicable law, regulatory authorities and the agreements governing our other indebtedness, including our current Credit Facility and other agreements we may enter into in the future, may restrict our ability to make payments on the Notes other than scheduled principal and interest, and as a result, upon a fundamental change we may not be able to repurchase the Notes and upon any conversions of the Notes may be unable to pay the cash amounts, if any, then due. Our inability to satisfy our obligations under the Notes could harm our reputation and affect the trading price of our common stock.
Our failure to repurchase Notes or to pay the cash amounts due upon conversion or at maturity when required will constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the other indebtedness and the Notes.
The issuance or sale of shares of our common stock, has been listed onor rights to acquire shares of our common stock, could depress the New York Stock Exchange under the symbol ‘GES.’ The following table sets forth, for the periods indicated, the high and low sales prices per common sharetrading price of the Company’sour common stock and the Notes.
We may conduct future offerings of our common stock, preferred stock or other securities that are convertible into or exercisable for our common stock to finance operations, fund acquisitions, or other purposes. In addition, we have reserved a substantial number of shares of our common stock for issuance upon the exercise of stock options, upon the vesting of restricted stock and restricted stock units pursuant to our employee benefit plans, upon conversion of the Notes and upon the exercise and settlement or termination of the warrant transactions. We have also recently increased our quarterly cash dividend which will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to decrease) of the Notes in accordance with the terms of the indenture. Refer to “— We cannot ensure that we will continue paying dividends paidat the current rates, or at all.” We cannot predict the size of future issuances or the effect they may have on the trading price of our common stock and the Notes.
If we issue additional shares of our common stock or rights to acquire shares of our common stock, if any of our existing stockholders sells a substantial amount of our common stock, or if the market perceives that such issuances or sales may occur, then the trading price of our common stock and the Notes may significantly decrease. In addition, our issuance of additional shares of common stock will dilute the ownership interests of our existing common stockholders.
Difficulties in the credit markets could have a negative impact on our customers, suppliers and business partners, which, in turn could materially and adversely affect our results of operations and liquidity.
The impact of difficult credit conditions on our customers, business partners, suppliers, insurance providers and financial institutions with which we do business cannot be predicted and may be quite severe. The inability of our manufacturers to ship our products could impair our ability to meet delivery date requirements. A disruption in the ability of our significant customers, distributors or licensees to access liquidity could cause serious disruptions or an overall deterioration of their businesses. A disruption in the ability of a large group of our smaller customers to access liquidity could have similar adverse effects, particularly in our important multi-brand wholesale channel in Southern Europe, where many customers tend to be relatively small and not well capitalized. These conditions could lead to significant reductions in future orders of our products and the inability or failure on our customers’ part to meet their payment obligations to us, any of which could have a material adverse effect on our results of operations and liquidity.
Similarly, a failure on the part of our insurance providers to meet their obligations for claims made by us could have a material adverse effect on our results of operations and liquidity. Continued market difficulties or additional deterioration could jeopardize our ability to rely on those financial institutions that are parties to our various bank facilities and foreign exchange contracts. We could be exposed to a loss if the counterparty fails to meet its obligations upon our exercise of foreign exchange contracts. In addition, instability or other distress in the financial markets could impair the ability of one or more of the banks participating in our credit agreements from honoring its commitments. This could have an adverse effect on our business if we were not able to replace those commitments or to locate other sources of liquidity on acceptable terms.
Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations under our outstanding indebtedness.
As of January 29, 2022, we had approximately $17.9 million of secured indebtedness, $363.5 million of senior unsecured indebtedness at maturity and approximately $325.8 million of trade payables on a consolidated basis.
We may incur additional indebtedness or draw on our existing credit facilities to meet future financing needs, some of which may be secured indebtedness.
Our indebtedness could have significant negative consequences for our security holders and our business, results of operations and financial condition by, among other things: (i) increasing our vulnerability to adverse economic and industry conditions; (ii) limiting our ability to obtain additional financing; (iii) requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, which will reduce the amount of cash available for other purposes; (iv) limiting our flexibility to plan for, or react to, changes in our business; (v) diluting the interests of our existing stockholders as a result of issuing shares of our common stock upon conversion of the Notes; and (vi) placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital.
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under our indebtedness, and our cash needs may increase in the future. In addition, our existing Credit Facility contains, and any future indebtedness may contain, financial and other restrictive covenants that limit our ability to operate our business, raise capital or make payments under our other indebtedness. If we fail to comply with these covenants or to make payments under our indebtedness when due, then we would be in default under that indebtedness, which could, in turn, result in that and our other indebtedness becoming immediately payable in full.
We conduct a significant amount of our operations through our subsidiaries and may rely on our subsidiaries to make payments under our outstanding indebtedness.
Our ability to pay amounts due on our outstanding indebtedness may depend on the cash flows of our subsidiaries and their ability to make distributions to us. Our subsidiaries are separate and distinct legal entities and any payments to us would depend on the earnings or financial condition of our subsidiaries and various business considerations. Statutory, contractual or other restrictions may also limit our subsidiaries’ ability to pay dividends or make distributions, loans or advances to us, and the notes and the Indenture (as defined below) pursuant to which the notes were issued do not limit or restrict our or our subsidiaries’ ability to enter into contractual restrictions on our subsidiaries’ ability to pay dividends or make distributions, loans or advances to us. For these reasons, we may not have access to any assets or cash flows of our subsidiaries to make payments on our outstanding indebtedness.
Recent and future regulatory actions and other events may adversely affect the trading price and liquidity of the Notes and the liquidity of the market for our common stock.
Noteholders may seek to employ a convertible note arbitrage strategy with respect thereto:to the Notes. Under this strategy, investors typically short sell a certain number of shares of our common stock and adjust their short position over time while they continue to hold the Notes. Investors may also implement this type of strategy by entering into swaps on our common stock in lieu of, or in addition to, short selling shares of our common stock.
The SEC and other regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including our common stock). These rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc., and the national securities exchanges of a “limit up-limit down” program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any governmental or regulatory action that restricts investors’ ability to effect short sales of our common stock or enter into equity swaps on our common stock could depress the trading price of, and the liquidity of the market for, the Notes.
In addition, the liquidity of the market for our common stock may decline, including as a result of our anticipated share repurchases, which could reduce the number of shares available for lending in connection with short sale transactions and the number of counterparties willing to enter into an equity swap on our common stock with a note investor. If investors and noteholders seeking to employ a convertible note arbitrage strategy are unable to borrow or enter into equity swaps on our common stock on commercially reasonable terms, then the trading price of, and the liquidity of the market for, the Notes may significantly decline.
|
| | | | | | | | | | | |
| Market Price | | Dividends Declared and Paid |
| High | | Low | |
Fiscal year ended January 28, 2017 | | | | | |
First Quarter Ended April 30, 2016 | $ | 22.50 |
| | $ | 16.70 |
| | $ | 0.225 |
|
Second Quarter Ended July 30, 2016 | 18.28 |
| | 14.23 |
| | 0.225 |
|
Third Quarter Ended October 29, 2016 | 18.20 |
| | 13.38 |
| | 0.225 |
|
Fourth Quarter Ended January 28, 2017 | 16.39 |
| | 11.95 |
| | 0.225 |
|
| | | | | |
Fiscal year ended February 3, 2018 | | | | | |
First Quarter Ended April 29, 2017 | $ | 13.66 |
| | $ | 10.50 |
| | $ | 0.225 |
|
Second Quarter Ended July 29, 2017 | 13.12 |
| | 9.70 |
| | 0.225 |
|
Third Quarter Ended October 28, 2017 | 17.44 |
| | 12.22 |
| | 0.225 |
|
Fourth Quarter Ended February 3, 2018 | 19.39 |
| | 14.61 |
| | 0.225 |
|
Provisions in the indenture for the Notes (the “Indenture”) could delay or prevent an otherwise beneficial takeover of us.On March��26, 2018,Certain provisions in the closing salesIndenture could make a third-party attempt to acquire us more difficult or expensive. If a takeover constitutes a fundamental change, then noteholders will have the right to require us to repurchase their Notes for cash. In addition, if a takeover constitutes a make-whole fundamental change, then we may be required to temporarily increase the conversion rate. As well, the Indenture prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. In such cases, and in other cases, our obligations under the Notes and the Indenture could increase the cost of acquiring us or otherwise discourage a third-party from acquiring us or removing incumbent management, including in a transaction that noteholders or holders of our common stock may view as favorable.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and results of operations.
In the event the conditional conversion feature of the Notes is triggered, noteholders will be entitled to convert the Notes at any time during specified periods at their option. If one or more noteholders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to settle all or a portion of the conversion obligation through the payment of cash, which could adversely affect our liquidity. Even if noteholders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current liability, which would result in a material reduction of our net working capital.
The accounting method for the Notes could adversely affect our reported financial condition and results.
The accounting method for reflecting the Notes on our balance sheet, accruing interest expense for the Notes and reflecting the underlying shares of our common stock in our reported diluted earnings per share may adversely affect our reported earnings and financial condition.
Under applicable accounting principles, the initial liability carrying amount of the Notes is the fair value of a similar debt instrument that does not have a conversion feature, valued using our cost of capital for straight, unconvertible debt. We reflect the difference between the net proceeds from the Notes offering and the initial carrying amount as a debt discount for accounting purposes, which will be amortized into interest expense over the term of the Notes. As a result of this amortization, the interest expense that we expect to recognize for the Notes for accounting purposes will be greater than the cash interest payments we will pay on the Notes, which will result in lower reported income or higher reported loss. The lower reported income or higher reported loss resulting from this accounting treatment could depress the trading price of our common stock and the Notes.
In August 2020, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance requiring, among other things, that the “if-converted” method be applied for all convertible instruments (the treasury stock method is no longer available) and removes the ability to rebut the presumption of share settlement for contracts that may be settled in cash or stock. We adopted this guidance on January 30, 2022 using the modified retrospective transition method, which allows for a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and does not require retrospective adjustments to prior periods. Under this new accounting guidance, diluted earnings per share will generally be calculated assuming all the Notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be antidilutive. Accordingly, among other impacts, we expect application of the if-converted method will result in an increase of approximately 11.6 million shares in our diluted weighted-average shares of common stock outstanding for the purposes of calculating diluted earnings per share, which will reduce our reported diluted earnings per share in the future.
Furthermore, if any of the conditions to the convertibility of the Notes is satisfied, then we may be required under applicable accounting standards to reclassify the liability carrying value of the Notes as a current, rather than a long-term, liability. This reclassification could be required even if no noteholders convert their Notes and could materially reduce our reported working capital.
The Notes’ hedge and warrant transactions may affect the value of the Notes and our common stock.
In connection with the pricing of the Notes, we entered into convertible note hedge transactions with the hedge counterparties. The convertible note hedge transactions covered, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of shares of common stock that initially underlie
the Notes, including those sold to the initial purchaser, and are expected generally to reduce the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be. We also entered into warrant transactions with the hedge counterparties relating to the same number of shares of our common stock, subject to customary antidilution adjustments. However, the warrant transactions could separately have a dilutive effect on our common stock to the extent that the market price per share of the Company’sour common stock as reported onexceeds the New York Stock Exchange Composite Tape, was $21.57. On March 26, 2018, there were 267 holders of recordstrike price of the Company’swarrants. In connection with establishing their initial hedges of the convertible note hedge and warrant transactions, the hedge counterparties or affiliates thereof entered into various derivative transactions with respect to our common stock.stock concurrently with or shortly after the pricing of the Notes, and may unwind these derivative transactions and purchase shares of our common stock in open market transactions shortly following the pricing of the Notes. These activities could increase (or reduce the size of any decrease in) the market price of our common stock or the Notes at that time.
PriorIn addition, the hedge counterparties or affiliates thereof may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the initiationmaturity of the Notes (and are likely to do so during any observation period related to a conversion of Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Notes.
We are subject to counterparty risk with respect to the Notes’ hedge transactions.
The hedge counterparties are financial institutions, and we are subject to the risk that they might default under the convertible note hedge transactions. Our exposure to the credit risk of the hedge counterparties is not secured by any collateral. Global economic conditions have from time to time resulted in the actual or perceived failure or financial difficulties of many financial institutions. If any hedge counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with such hedge counterparty. Our exposure will depend on many factors, but, generally, the increase in our exposure will be correlated to the increase in the market price and in the volatility of our common stock. In addition, upon a default by a hedge counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the hedge counterparties.
Conversion of the Notes or exercise of the warrants evidenced by the warrant transactions may dilute the ownership interest of existing stockholders.
At our election, we may settle Notes tendered for conversion entirely or partly in shares of our common stock. Furthermore, the warrants evidenced by the warrant transactions are expected to be settled on a net-share basis. As a result, the conversion of some or all of the Notes or the exercise of some or all of such warrants may dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion of the Notes or such exercise of the warrants could adversely affect prevailing market prices of our common stock and, in turn, the price of the Notes. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could depress the price of our common stock.
Our repurchases of shares of our common stock may affect the value of the Notes and our common stock.
After effectuating the convertible note hedge transactions, we used substantially all of the net proceeds of the Notes offering to repurchase shares of our common stock pursuant to our 2012 $500 million share repurchase program. Some of these transactions were effected by repurchases from purchasers of the Notes in privately negotiated transactions through the initial purchaser or its affiliate, as our agent, concurrently with the closing of the Notes offering. During fiscal 2022, our Board of Directors terminated this previous share repurchase program and authorized a new $200 million share repurchase program (the “2021 Share Repurchase Program”). Accordingly, we may continue to effect repurchases in open market or other transactions from time to time in the future. On March 14, 2022, the Board of Directors expanded the 2021 Share Repurchase Program authorization by $100 million. In connection with this expanded authorization, on March 18, 2022, we entered into an accelerated share repurchase (“2022 ASR Contract”) arrangement to repurchase an aggregate of $175 million of our common stock.
Repurchases of shares of our common stock may cause or avoid an increase or a decrease in the market price of our common stock or the Notes and add volatility. There can be no assurance that repurchases will be
made at the best possible price. Potential risks and uncertainties also include, but are not necessarily limited to, the amount and timing of future share repurchases and the origin of funds used for such repurchases. The existence of a share repurchase program could also cause the market price of our common stock to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our common stock. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time. Any such suspension could cause the market price of our common stock to decline.
Fluctuations in quarterly dividendperformance including comparable store sales, sales per square foot, operating margins, timing of wholesale orders, royalty net revenue or other factors could have a material adverse effect on February 12, 2007,our earnings and our stock price.
Our quarterly results of operations for each of our business segments have fluctuated in the Company hadpast and can be expected to fluctuate in the future. Further, if global growth plans or productivity initiatives fail to meet our expected results, our overhead and other costs could increase without an offsetting increase in sales and net revenue. This could have a material adverse effect on our results of operations and financial condition, including but not declaredlimited to future impairments of store assets or goodwill.
Our net revenue and operating results have historically been lower in the first half of our fiscal year due to general seasonal trends in the apparel and retail industries. Our comparable store sales, quarterly results of operations and stock price can also be affected by a variety of other factors, including, but not limited to: (i) shifts in consumer tastes and fashion trends; (ii) the timing of new store openings and the relative proportion of new stores to mature stores; (iii) the timing and effectiveness of planned store closures; (iv) calendar shifts of holiday or seasonal periods; (v) the timing of seasonal wholesale shipments; (vi) the effectiveness of our inventory management; (vii) the effectiveness and efficiency of our product distribution network; (viii) changes in our merchandise mix; (ix) changes in our mix of revenues by segment; (x) the timing of promotional events; (xi) actions by competitors; (xii) weather conditions; (xiii) public health crises; (xiv) changes in the business environment; (xv) inflationary changes in prices and costs; (xvi) changes in the payment of future cash dividends; (xvii) changes in currency exchange rates; (xviii) population trends; (xix) changes in patterns of commerce such as the expansion of e-commerce; (xx) the level of pre-operating expenses associated with new stores; and (xxi) volatility in securities’ markets which could impact the value of our investments in non-operating assets.
An unfavorable change in any of the above factors, among others could have a material adverse effect on our results of operations and our stock price.
We cannot ensure we will continue paying dividends at the current rates or at all.
We cannot ensure we will continue periodic dividends on our common stock sinceat the current rates, or at all. On November 23, 2021, we announced an increase to our initial public offering in 1996. Theregular quarterly cash dividend from $0.1125 to $0.225 per share on our common stock. During the first and second quarters of fiscal 2021, we announced that our Board of Directors had deferred the decision with respect to the payment of our quarterly cash dividend, in light of the uncertainties related to the COVID-19 pandemic. We resumed paying our quarterly cash dividend of $0.1125 per share beginning in the third quarter of fiscal 2021, but decided to not declare any cash dividends for the first and second quarters of fiscal 2021.
Changes in our dividend and market perceptions and expectations with respect to our dividend, may materially affect the price of our common stock and the Notes (as defined below). In addition, pursuant to the terms of the indenture governing the Notes, our increase to the quarterly cash dividend in fiscal 2022 requires adjustments to the conversion rate (resulting in an increase in the futureconversion rate) and the conversion price (resulting in a decrease in the conversion price) in connection with the payment of the quarterly dividend. Refer to “Part IV. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions” in this Form 10-K for disclosures about the Notes.
Any quarterly dividends on our common stock will be paid from funds legally available for such purpose when, as and if declared by our Board of Directors. Holders of our equity securities have no contractual or other legal right to receive dividends. Decisions on whether, when and in which amounts to continue making any future dividend distributions are entirely at the discretion of our Board of Directors, which reserves the right, in its sole discretion, to change or terminate our dividend practices at any time and willfor any reason without prior notice, including without limitation for any of the following reasons: (i) our cash requirements or plans might change for a wide variety of reasons, including changes in our financial position, capital allocation plans (including a desire to retain or accumulate cash), capital spending plans, stock purchase plans, acquisition strategies, strategic
initiatives, debt payment plans (including a desire to maintain or improve credit ratings on our debt securities), pension funding or other benefits payments; (ii) our ability to service and refinance our current and future indebtedness and our ability to borrow or raise additional capital to satisfy our capital needs; (iii) the amount of dividends that we may distribute to our shareholders is subject to restrictions under applicable law and restrictions imposed by our existing or future credit facilities, debt securities, then-outstanding preferred stock securities, if any, leases and other agreements, including restricted payment and leverage covenants; and (iv) the amount of cash that our subsidiaries may make available to us, whether by dividends, loans or other payments, may be based uponsubject to the legal, regulatory and contractual restrictions in our outstanding indebtedness.
Our Two Founding Board Members own a significant percentage of our common stock. Their respective interests may differ from the interests of our other stockholders.
Maurice Marciano, Board member, and Paul Marciano, Chief Creative Officer and Board member, collectively, beneficially own approximately 42% of our outstanding shares of common stock as of March 21, 2022. The sale or prospect of the sale of a substantial number of these shares could have an adverse impact on the market price of our common stock. Moreover, these individuals may have different interests than our other stockholders or among themselves and, accordingly, they may seek to direct the operations of our business in a manner contrary to the interests of our other stockholders. As long as these individuals own a significant percentage of our common stock, if aligned, they may effectively be able to: (i) elect our directors; (ii) amend or prevent amendment of our Restated Certificate of Incorporation or Bylaws; (iii) effect or prevent a merger, sale and/or purchase of assets or other corporate transactions; and (iv) control the outcome of any other matter submitted to our stockholders for vote.
Their stock ownership, together with the anti-takeover effects of certain provisions of applicable Delaware law and our Restated Certificate of Incorporation and Bylaws, may discourage acquisition bids or allow the Marciano’s to delay or prevent a change in control that may be favored by our other stockholders, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our common stock price.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2. Properties.
As of January 29, 2022, all of our principal facilities were leased with the exception of our U.S. distribution center based in Louisville, Kentucky and our administrative office based in Florence, Italy. Certain information concerning our principal facilities is set forth below:
| | | | | | | | | | | | | | |
Location | | Use | | Approximate Area in Square Feet |
| | | | |
Lugano (Bioggio)/Stabio, Switzerland | | Principal executive and administrative offices, global design, sourcing, marketing and licensing facilities, sales offices and showrooms used by our Europe segment and Corporate support group | | 190,800 | |
Los Angeles, California | | Executive and administrative offices, supporting design, sourcing and licensing facilities, sales offices and warehouse facilities used by our Americas Wholesale, Americas Retail, and Corporate support group | | 341,700 | |
Piacenza, Italy | | Distribution and warehousing facilities used by our Europe segment | | 592,000 | |
Venlo, Netherlands | | Distribution and warehousing facilities used by our Europe segment | | 506,700 | |
Louisville, Kentucky | | Distribution and warehousing facility used by our Americas Wholesale and Americas Retail segments | | 506,000 | |
| | | | |
Jasin/Katowice, Poland | | Distribution and warehousing facilities and administrative offices used by our Europe segment | | 235,400 | |
Montreal/Toronto/Vancouver, Canada | | Administrative offices, showrooms and warehouse facilities used by our Americas Wholesale and Americas Retail segments | | 203,100 | |
| | | | |
| | | | |
| | | | |
| | | | |
Florence, Italy | | Administrative office used by our Europe segment | | 113,000 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Seoul, South Korea | | Administrative and sales offices, design facilities and showrooms used by our Asia segment | | 41,200 | |
| | | | |
| | | | |
Shanghai, China | | Administrative offices used by our Asia segment | | 17,800 | |
| | | | |
| | | | |
| | | | |
Our North American corporate, wholesale and retail headquarters and certain warehouse facilities are located in Los Angeles, California, consisting of four buildings totaling approximately 341,700 square feet (the “North American Corporate Headquarters”) and a parking lot adjacent to the North American Corporate Headquarters. These facilities are leased by us from limited partnerships in which the sole partners are trusts controlled by and for the benefit of Maurice Marciano and Paul Marciano (the “Principal Stockholders”) and their families pursuant to a lease that expires September 30, 2025, with an additional five-year renewal option to September 30, 2030 at our sole discretion. The related lease liability was approximately $48.4 million as of January 29, 2022.
In addition, through a wholly-owned Canadian subsidiary, we lease warehouse and administrative facilities in Montreal, Quebec from a partnership affiliated with the Principal Stockholders. During the second quarter of fiscal 2022, we entered into a lease amendment to extend the lease term through August 2023. The base rent is approximately CAD$0.6 million (US$0.5 million) per year with all other terms of the existing lease remaining in full force and effect. The related lease liability was approximately CAD$0.9 million (US$0.7 million) as of January 29, 2022.
Through a French subsidiary, we lease a showroom and office space located in Paris, France from an entity that is owned in part by an affiliate of the Principal Stockholders. During the first quarter of fiscal 2022, we entered into a nine-year lease extension which includes an option for early termination at the end of the third and sixth years. The lease has standard terms with a quarterly base charge plus a variable charge aggregating approximately €0.9 million (US$1.0 million) per year (with subsequent annual rent adjustments based on a specific price index). All other material terms in the previously existing Paris lease remain the same. The related lease liability was approximately €5.8 million (US$6.4 million) as of January 29, 2022.
Refer to “Part IV. Financial Statements – Note 14 – Related Party Transactions” in this Form 10-K for disclosures about our related party transactions.
Our U.S. distribution center is a fully automated facility based in Louisville, Kentucky. Distribution of our products in Canada is handled primarily from two leased facilities based in Montreal, Quebec. Distribution of our products in Europe is handled by third-party distributors. Additionally, we utilize several third-party operated distribution warehouses that service the Asia region.
We lease our showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under non-cancelable operating lease agreements expiring on various dates through January 2039. These facilities had aggregate real estate lease liabilities as of January 29, 2022 totaling approximately $699.7 million, excluding related party liabilities. See “Part IV. Financial Statements – Note 9 – Lease Accounting” in this Form 10-K for further detail.
We believe our existing facilities are well maintained, in good operating condition and are adequate to support our present level of operations.
ITEM 3. Legal Proceedings.
Refer to “Part IV. Financial Statements – Note 15 – Commitments and Contingencies” in this Form 10-K for disclosures about our legal and other considerations, including our cash flow from operations, capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions and U.S. and global liquidity. On March 21, 2018, the Company announced a regular quarterly cash dividend of $0.225 per share on the Company’s common stock.proceedings.
ITEM 4. Mine Safety Disclosures.
Not applicable.
Performance Graph
The Stock Price Performance Graph below compares the cumulative stockholder return of the Company with that of the S&P 500 Index (a broad equity market index) and the S&P 1500 Apparel Retail Index (a published industry index) over the five fiscal year period beginning February 2, 2013. The return on investment is calculated based on an investment of $100 on February 2, 2013, with dividends, if any, reinvested. Past performance is not necessarily indicative of future performance.
COMPARISON OF FIVE YEAR TOTAL RETURN
AMONG GUESS?, INC.,
S&P 500 INDEX AND S&P 1500 APPAREL RETAIL INDEX
Period Ending
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Company/Market/Peer Group | | 2/2/2013 | | 2/1/2014 | | 1/31/2015 | | 1/30/2016 | | 1/28/2017 | | 2/3/2018 |
Guess?, Inc. | | $ | 100.00 |
| | $ | 105.70 |
| | $ | 73.54 |
| | $ | 76.01 |
| | $ | 53.47 |
| | $ | 68.02 |
|
S&P 1500 Apparel Retail Index | | $ | 100.00 |
| | $ | 113.05 |
| | $ | 135.97 |
| | $ | 141.61 |
| | $ | 137.98 |
| | $ | 146.62 |
|
S&P 500 Index | | $ | 100.00 |
| | $ | 120.30 |
| | $ | 137.42 |
| | $ | 136.50 |
| | $ | 164.99 |
| | $ | 202.66 |
|
Share Repurchase Program
The Company’s share repurchases during each fiscal month of the fourth quarter of fiscal 2018 were as follows:
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| | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs |
October 29, 2017 to November 25, 2017 | | | | | | | |
Repurchase program (1) | 565,228 |
| | $ | 16.07 |
| | 565,228 |
| | $ | 414,409,934 |
|
Employee transactions (2) | 695 |
| | $ | 16.49 |
| | — |
| | |
|
November 26, 2017 to December 30, 2017 | | | | | | | |
Repurchase program (1) | 1,000,000 |
| | $ | 16.19 |
| | 1,000,000 |
| | $ | 398,222,536 |
|
Employee transactions (2) | 109 |
| | $ | 16.25 |
| | — |
| | |
|
December 31, 2017 to February 3, 2018 | | | | | | | |
Repurchase program (1) | 381,192 |
| | $ | 15.81 |
| | 381,192 |
| | $ | 392,195,952 |
|
Employee transactions (2) | 130,129 |
| | $ | 16.52 |
| | — |
| | |
|
Total | | | | | | | |
Repurchase program (1) | 1,946,420 |
| | $ | 16.08 |
| | 1,946,420 |
| | |
|
Employee transactions (2) | 130,933 |
| | $ | 16.52 |
| | — |
| | |
|
| |
(1) | On June 26, 2012, the Company’s Board of Directors authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to $500 million of the Company’s common stock. Repurchases under the program may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under the program, which may be discontinued at any time, without prior notice.
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| |
(2) | Consists of shares surrendered to, or withheld by, the Company in satisfaction of employee tax withholding obligations that occur upon vesting of restricted stock awards/units granted under the Company’s 2004 Equity Incentive Plan, as amended. |
ITEM 6. Selected Financial Data.
The selected financial data set forth below has been derived from the audited Consolidated Financial Statements of the Company and the related notes thereto. The following selected financial data should be read in conjunction with the Company’s Consolidated Financial Statements and the related notes contained herein and with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information regarding accounting changes, acquisitions and other items affecting comparability.
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| | | | | | | | | | | | | | | | | | | |
| Year Ended (1) |
| Feb 3, 2018 |
| Jan 28, 2017 |
| Jan 30, 2016 |
| Jan 31, 2015 | | Feb 1, 2014 |
| (in thousands, except per share data) |
Statements of income data: | |
| |
| |
| |
| |
Net revenue (2) | $ | 2,363,754 |
| | $ | 2,190,453 |
| | $ | 2,184,495 |
| | $ | 2,395,447 |
| | $ | 2,545,771 |
|
Earnings from operations (3) (4) (5) | 65,173 |
| | 22,708 |
| | 121,350 |
| | 125,912 |
| | 222,587 |
|
Income tax expense (6) | 74,172 |
| | 28,212 |
| | 42,464 |
| | 45,824 |
| | 75,248 |
|
Net earnings (loss) attributable to Guess?, Inc. (3) (4) (5) (6) (7) | (7,894 | ) | | 22,761 |
| | 81,851 |
| | 94,570 |
| | 153,434 |
|
Net earnings (loss) per common share attributable to common stockholders (3) (4) (5) (6) (7): | | | | | | | | | |
Basic | $ | (0.11 | ) | | $ | 0.27 |
| | $ | 0.97 |
| | $ | 1.11 |
| | $ | 1.81 |
|
Diluted | $ | (0.11 | ) | | $ | 0.27 |
| | $ | 0.96 |
| | $ | 1.11 |
| | $ | 1.80 |
|
Dividends declared per common share | $ | 0.90 |
| | $ | 0.90 |
| | $ | 0.90 |
| | $ | 0.90 |
| | $ | 0.80 |
|
Weighted average common shares outstanding—basic | 82,189 |
| | 83,666 |
| | 84,264 |
| | 84,604 |
| | 84,271 |
|
Weighted average common shares outstanding—diluted | 82,189 |
| | 83,829 |
| | 84,525 |
| | 84,837 |
| | 84,522 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 | | Jan 31, 2015 | | Feb 1, 2014 |
Balance sheet data: | |
| |
| |
| |
| |
Working capital (8) | $ | 640,860 |
| | $ | 698,559 |
|
| $ | 709,193 |
| | $ | 790,333 |
| | $ | 821,661 |
|
Total assets | 1,655,634 |
| | 1,534,485 |
|
| 1,538,748 |
| | 1,601,405 |
| | 1,764,431 |
|
Borrowings and capital lease, excluding current installments | 39,196 |
| | 23,482 |
|
| 2,318 |
| | 6,165 |
| | 7,580 |
|
Stockholders’ equity | 933,475 |
| | 980,994 |
|
| 1,031,293 |
| | 1,089,446 |
| | 1,169,986 |
|
| |
(1) | The Company operates on a 52/53-week fiscal year calendar, which ends on the Saturday nearest to January 31 of each year. The results for fiscal 2018 included the impact of an additional week which occurred during the fourth quarter ended February 3, 2018.
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| |
(2) | During the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales. Accordingly, prior period amounts related to net royalties, net revenue and cost of product sales have been adjusted to conform to the current period presentation. This resulted in a decrease to net revenue and cost of product sales of $18.9 million, $19.8 million, $22.2 million and $24.0 million during fiscal 2017, fiscal 2016, fiscal 2015 and fiscal 2014, respectively. This reclassification had no impact on previously reported earnings from operations, net earnings attributable to Guess?, Inc. or net earnings per share. Refer to Note 1 to the Consolidated Financial Statements for further information regarding this reclassification. |
| |
(3) | During fiscal 2018, the Company incurred net losses on lease terminations of $11.4 million related primarily to the modification of certain lease agreements held with a common landlord in North America. During fiscal 2017, fiscal 2016 and fiscal 2015, the Company recorded net gains on lease terminations of $0.7 million, $2.3 million and $3.8 million, respectively, related primarily to the early termination of certain lease agreements in Europe. There were no net gains (losses) on lease terminations during fiscal 2014. |
| |
(4) | During each of the years presented, the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures. Asset impairment charges recognized were approximately $8.5 million in fiscal 2018, $34.4 million in fiscal 2017, $2.3 million in fiscal 2016, $24.8 million in fiscal 2015 and $8.8 million in fiscal 2014. Refer to Note 5 to the Consolidated Financial Statements for further detail.
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(5) | During fiscal 2017, the Company incurred restructuring charges of $6.1 million. During fiscal 2014, the Company incurred restructuring charges of $12.4 million. Refer to Note 9 to the Consolidated Financial Statements for further detail. |
| |
(6) | During fiscal 2018, the Company recognized additional tax expense of $47.9 million related to the enactment of the Tax Reform. This is comprised of a $24.9 million charge for the provisional re-measurement of certain deferred taxes and related amounts and a provisional charge of $23.0 million to income tax expense for the estimated effects of the transitional tax on the deemed repatriation of foreign earnings. During fiscal 2017, the Company recorded valuation reserves of $6.8 million resulting from jurisdictions where there have been cumulative net operating losses, limiting the Company’s ability to consider other subjective evidence to continue to recognize the existing deferred tax assets. During fiscal 2017, the Company also recorded an estimated exit tax charge of $1.9 million related to the Company’s reorganization in Europe as a result of its global cost reduction and restructuring plan. Refer to Note 11 to the Consolidated Financial Statements for further detail.
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(7) | During fiscal 2017, the Company sold its minority interest equity holding in a privately-held boutique apparel company for net proceeds of approximately $34.8 million, which resulted in a gain of approximately $22.3 million which was recorded in other income. |
| |
(8) | In November 2015, authoritative guidance was issued which simplifies the presentation of deferred income taxes by requiring that all deferred tax liabilities and assets be classified as long-term on the balance sheet. The Company adopted this guidance during the fourth quarter of fiscal 2016 and has applied it retrospectively to all periods presented herein. |
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
Unless the context indicates otherwise, when we refer to “we,” “us,” “our” or the “Company” in this Form 10‑K, we are referring to Guess?, Inc. and its subsidiaries on a consolidated basis.
Business Segments
The Company’sOur businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail, Americas Wholesale, Europe, Asia and Licensing. The Americas Retail segment includes our retail and e-commerce operations in the Americas. The Americas Wholesale segment includes our wholesale operations in the Americas. The Europe segment includes our retail, e-commerce and wholesale operations in Europe and the Middle East. The Asia segment includes our retail, e-commerce and wholesale operations in Asia and the Pacific. The Licensing segment includes our worldwide licensing operations. Refer to “Part IV. Financial Statements – Note 18 – Segment Information” in this Form 10-K for disclosures about our segment financial information.
Americas Retail Segment
In our Americas Retail segment, we sell our products direct-to-consumer through a network of directly operated retail and factory outlet stores and e-commerce sites in the Americas.
Retail stores and concessions. Our Americas Retail stores and concessions are comprised of a mix of GUESS? factory outlet stores, full-priced GUESS? retail stores, G by GUESS (GbG) stores, GUESS? Accessories stores and MARCIANO stores. During fiscal 2018,2021, we made the decision to integrate our G by GUESS brand into our Factory business over time in order to drive further efficiencies. During fiscal 2022, we opened 10 new stores and closed 17 stores in the Americas, ending the year with 388 stores. This store count does not include 29 concessions in Mexico. We directly operated our retail stores and concessions in Mexico and Brazil through our majority-owned joint ventures.
e-Commerce. Our Americas Retail segment also includes our directly operated retail and other marketplace websites in the U.S., Canada, Mexico and Brazil. These websites operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands. They also provide fashion information and a mechanism for customer feedback while promoting customer loyalty and enhancing our brand identity through interactive content online and through smartphone applications. Our U.S. and Canadian online sites are fully integrated with our customer relationship management (“CRM”) system and loyalty programs. Omni-channel initiatives that we have already deployed in the U.S. and Canada include “buy online, pick-up in stores” or “buy online, return in stores” and “order from store” as well as mobile-optimized commerce sites and smartphone applications. In the U.S. and Canada, e-commerce orders may be fulfilled from our distribution centers, or from our retail stores, or both.
Americas Wholesale Segment
In our Americas Wholesale segment, we sell our products through wholesale channels throughout the Americas and to third-party distributors based in Central and South America as well as licensed retail locations operated by our wholesale partners. Our Americas Wholesale business generally experiences stronger performance from July through November. Our Americas Wholesale customers consist primarily of better department stores, select specialty retailers, upscale boutiques as well as select off-price retailers. Our products were sold to consumers through approximately 1,450 and 1,350major doors in the Americas, as well as through our customers’ e-commerce sites, as of January 29, 2022 and January 30, 2021, respectively. As of January 29, 2022, these locations included approximately 750 shop-in-shops, a designated selling area within a department store offering a wide array of our products and incorporates GUESS? signage and fixture designs. These shop-in-shops, managed by the department stores, allow us to reinforce the GUESS? brand image with our customers. Many department stores have more than one shop-in-shop, with each one featuring women’s, men’s or kids’ apparel and handbags. We also sell product to licensed retail stores and concessions operated by certain wholesale customers. As of January 29, 2022, we had 34 licensed retail stores in the Americas, all of which were located in Central and South America. This store count does not include one concession that was operated by one of our partners in the U.S.
Our Americas Wholesale merchandising strategy is to focus on trend-right products supported by key fashion basics. We have sales representatives in New York, Los Angeles, Toronto, Montreal, Mexico City and Vancouver who coordinate with customers to determine the inventory level and product mix that should be carried in each store. Additionally, we use merchandise coordinators who work with the stores to ensure that our products are displayed appropriately. During fiscal 2022, our two largest wholesale customers accounted for a total of approximately 3.9% of our consolidated net revenuerevenue.
Europe Segment
In our Europe segment, we sell our products through direct-to-consumer and wholesale channels throughout Europe and the Middle East.
European Direct-to-Consumer. Our European direct-to-consumer network is comprised of brick-and-mortar retail stores and concessions and e-commerce sites.
Retail stores and concessions. Our European retail stores and concessions are primarily comprised of a mix of directly operated GUESS? retail and outlet stores, MARCIANO retail stores, GUESS? Accessories retail and outlet stores, GUESS? Footwear stores and GUESS? Kids stores. During fiscal 2022, we opened 71 new stores and closed 22 stores, ending the year with 556 directly operated stores in Europe and the Middle East. This store count does not include 50directly operated concessions in Europe. Certain of our European stores require initial investments in the form of key money to secure prime store locations. These amounts are paid to landlords or existing lessees in certain circumstances.
e-Commerce. Our Europe segment also includes our directly operated retail and other marketplace websites. In Europe, similar to the Americas, our e-commerce sites operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands. We have deployed omni-channel initiatives in our European markets, including “buy online, ship from store” and “buy in store, deliver by e-commerce.” We currently offer interactive content online and via mobile, and are planning to expand to smartphone applications.
European Wholesale Distribution. We sell our products both through wholesale distribution channels and through licensed retail stores and concessions operated by our wholesale partners throughout Europe and the Middle East. Our European wholesale business generally relies on a large number of smaller regional distributors and agents to distribute our products primarily to smaller independent multi-brand boutiques. Our products are also sold directly to large, well-known department stores like El Corte Inglès, Galeries Lafayette and Printemps. The type of customer varies from region to region depending on both the prominence of the GUESS? brand in each region and the dominance of a particular type of retail channel in each region. In countries where the brand is well known, we operate through showrooms where agents and distributors can view our line and place orders. We currently have showrooms in key cities such as Barcelona, Düsseldorf, Lugano, Munich, Paris, Lisbon, Florence, Moscow and Warsaw. We sell both our apparel and certain accessories products under our GUESS? and MARCIANO brand concepts through our wholesale channel, operating primarily through two seasons, Spring/Summer and Fall/Winter. Generally, our Spring/Summer sales campaign is from April to September with the related shipments occurring primarily from November to April. The Fall/Winter sales campaign is from November to April with the related shipments occurring primarily from May to October. We may take advantage of early-season demand and potential reorders by offering a pre-collection assortment which ships at the beginning of each season. Customers retain the ability to request early shipment of backlog orders, delay shipments or cancel orders depending on their needs. Revenues from sales to our wholesale licensed stores are also recognized as wholesale sales within our European wholesale operations. During fiscal 2022, our partners opened 19 new licensed retail stores and closed 14 stores, ending the year with 223 licensed retail stores in Europe and the Middle East.
Asia Segment
In our Asia segment, we sell our products through direct-to-consumer and wholesale channels throughout Asia and the Pacific.
Asian Direct-to-Consumer. Our Asian direct-to-consumer network is comprised of brick-and-mortar retail stores and concessions and e-commerce sites.
Retail stores and concessions. Our Asian retail stores and concessions include a mix of directly operated GUESS?, GUESS? Footwear, GUESS? Accessories, GUESS? Kids and MARCIANO stores. During fiscal 2022, we opened six new stores and closed 26 stores, including stores transferred to and from our partners and other store relocations and remodels. We ended the year with 124 directly operated stores in Asia and the Pacific. This store count does not include 99 directly operated apparel and accessory concessions. Concessions are widely used in Asia and generally represent directly managed areas within a department store setting.
e-Commerce. We also have e-commerce sites throughout Asia which operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands.
Asian Wholesale Distribution. Our Asian wholesale customer base is comprised primarily of a small number of selected distributors with which we have contractual distribution arrangements and licensed stores and concessions operated by our wholesale partners. During fiscal 2022, our partners opened 54 new licensed retail stores and closed 17 stores, including stores transferred to and from our partners and other store relocations and remodels. We ended the year with 306 licensed retail stores. This store count does not include 158 apparel and accessory concessions operated by our partners in Asia.
Licensing Segment
Our Licensing segment includes our worldwide licensing operations. The desirability of the GUESS? brand name among consumers has allowed us to selectively expand our product offerings and global markets through trademark licensing arrangements, with minimal capital investment or on-going operating expenses. We currently have various domestic and international licenses that include eyewear, watches, handbags, footwear, kids’ and infants’ apparel, outerwear, undergarments and sleepwear, fragrance, jewelry and other fashion accessories; and include licenses for the design, manufacture and distribution of GUESS? branded products in markets which include Africa, Asia, Australia, Europe, the Middle East, Central America, North America and South America.
Our trademark license agreements customarily provide for a multi-year initial term generally ranging from three to ten years, and may contain options to renew prior to expiration for an additional multi-year period. The typical license agreement requires that the licensee pay us the greater of a royalty based on a percentage of the licensee’s net sales of licensed products or a guaranteed annual minimum royalty that typically increases over the term of the license agreement. In addition, several of our key license agreements provide for specified, fixed cash rights payments over and above our normal, ongoing royalty payments. Generally, licensees are required to spend a percentage of the net sales of licensed products for advertising and promotion of the licensed products and, in many cases, we place the ads on behalf of the licensee and are reimbursed. Additionally, licensees also make contributions to advertising funds, as a percentage of their sales, or may elect to increase their contribution to support specific brand-building initiatives.
In addition, to protect and increase the value of our trademarks, our license agreements include strict quality control and manufacturing standards. Our licensing personnel meet regularly with licensees to ensure consistency with our overall merchandising and design strategies in order to protect the GUESS? trademarks and brand. As part of this process, our licensing department reviews in advance GUESS? third-party licensed products, advertising and promotional materials.
We strategically reposition our existing licensing portfolio by monitoring and evaluating the performance of our licensees worldwide. For instance, between 2005 and 2013, we acquired several of our European apparel licensees. As a result, we now directly manage our adult and children’s apparel businesses in Europe.
Strategic Partnerships
We evaluate opportunities for strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall strategic initiatives and/or will take advantage of economies of scale. Similarly, when existing investments and alliances no longer align with strategic initiatives or as other circumstances warrant, we will evaluate various exit opportunities. As of the date of this Annual Report, we have majority-owned joint ventures in Brazil, the Canary Islands, Mexico, Portugal, Russia and a minority-owned joint venture in South Africa. These joint ventures allow us to accelerate expansion, revitalize certain regions, and provide enhanced development of our retail and wholesale channels in these regions.
Design
Apparel products are designed by in-house design teams that collaborate to share ideas for products that can be sold throughout our global markets and are inspired by our GUESS? heritage. Our design teams seek to identify global fashion trends and interpret them for the style-conscious consumer while retaining the distinctive GUESS? image. They travel throughout the world in order to monitor fashion trends and discover new fabrics. These fabrics, together with the trends observed by our designers, serve as the primary source of inspiration for our lines and collections. In fiscal 2021, we developed our first ever global line of apparel products and in fiscal 2022, we developed our first ever global line across all product categories including accessories. In addition to driving efficiencies, this initiative is expected to help elevate our brand by allowing us to offer products to our customers across all markets from one line while still addressing each local market’s need. We also maintain a fashion library consisting of vintage and contemporary garments as another source of creative concepts. In addition, our design teams work closely with members of our sales, merchandising and retail operations teams to further refine our products to meet the particular needs of our markets.
Global Sourcing and Supply Chain
We source products through numerous suppliers, many of whom have established long-term relationships with us. We seek to achieve efficient and timely delivery of our products, combining global and local sourcing.
Almost all of our products are acquired as full package purchases where we design and source product and the vendor delivers the finished product.
We believe that our balanced global supply chain, with deep vendor partnerships, provides us with a competitive advantage where we have the flexibility to respond to increased demand throughout the world. Our new global apparel line of products will help improve product development costs by reducing the number of styles and help drive efficiencies in product costs by consolidating orders from multiple regions. Our sourcing strategy provides us with the opportunity to leverage costs and expensesimprove speed-to-market.
As an ongoing strategic initiative, we leave a larger portion of our buys open prior to each season to improve the efficiency of our speed-to-market by allowing us to design and produce closer to market delivery. This allows us to better react to emerging fashion trends in the market. We are also continuously searching for certain globally serviced customers were reclassified intonew suppliers and sourcing opportunities in reaction to the segment primarilylatest trends. We have developed IT systems to capture and share key performance indicators with our partners to drive ongoing improvements. During fiscal 2022, we continued to significantly reduce our vendor base to around 100 suppliers. We also made continued progress on reducing our dependency on sourcing from China and mitigating potential tariff risk without compromising the quality of our products. Additionally, offering an assortment of global products continues to be an area of focus. As a global brand, we maintain skilled sourcing teams in North America, Europe and Asia.
We are committed to sourcing our products in a responsible manner, respecting both the countries in which we conduct business and the business partners that produce our products. Our global supply chain Social Responsibility program reflects our strong commitment to help our suppliers implement best practices in safe and decent work and achieve meaningful improvements in the lives of their workers.
Our program highlights three areas—factory approvals, factory monitoring and remediation, and supplier training and education.
All directly-sourced supplier factories go through a strict approval process before being authorized to work with Guess. To support and ensure our social compliance, we communicate our expectations to our partners through our Global Suppliers Code of Conduct (“Guess CoC”), which sets the minimum requirements for all factories where Guess branded items are manufactured. Although local customs vary in different regions of the world, we believe that the issues of business ethics, human rights, health, safety and environmental stewardship transcend geographical boundaries.
Initial audits assess compliance and allow us to engage and educate new suppliers on our standards and create the groundwork for strong relationships based on continuous improvement. If deficiencies are discovered, personnel in each region are empowered to work with the respective business partner to take a corrective course of action. Additionally, the goal of this process is to educate individuals, build strategic relationships and improve business practices over the long-term.
We also believe in a proactive educational approach, providing many types of training to factory personnel with the aim to increase their awareness of Guess CoC best practices and build compliance capacity.
In addition, we are committed to increased sourcing of environmentally preferred materials as part of our sustainability commitments to reduce reliance on virgin raw materials, support industry innovation and best practices in land use and agriculture, and reduce waste. We are actively engaging our partners to transition to more sustainable materials, as well as to advance production processes through education.
Advertising and Marketing
Our advertising, public relations and marketing strategy is designed to promote a consistent high impact image which endures regardless of changing consumer trends. While our advertising promotes products, the primary emphasis is on brand image.
Since our inception, Paul Marciano, our Chief Creative Officer and Director, has had principal responsibility for the relationship.GUESS? brand image and creative vision. Throughout our history, we have maintained a high degree of consistency in our advertisements by using similar themes and images, including our signature black and white print advertisements and iconic logos.
We deploy a variety of media focused on national and international contemporary fashion/beauty, lifestyle and celebrity outlets. In recent years, we have also expanded our efforts into influencer marketing, digital
advertising with leading fashion and lifestyle websites and advertising on social media platforms, including YouTube, Facebook, Instagram, Twitter, Pinterest, Reddit, Snapchat, TikTok and global search engines. Our smartphone applications provide a unique mobile media experience by combining fashion, e-commerce, personalized product recommendations, targeted promotions and social loyalty rewards to drive mobile brand engagement.
We also require our licensees and distributors to invest a percentage of their net sales of licensed products and net purchases of GUESS? products in Company-approved advertising, promotion and marketing. By retaining control over our advertising programs, we are able to maintain the integrity of our brands while realizing substantial cost savings compared to outside agencies.
We will continue to regularly assess and implement marketing initiatives that we believe will build brand equity and grow our business by investing in marketing programs to build awareness and drive customer traffic to our stores, websites and smartphone applications. We plan to further strengthen communications with customers through an emphasis on digital marketing, and through our websites, loyalty programs, direct catalog and marketing mailings. We also plan to strengthen communities on various social media platforms, which enable us to provide timely information in an entertaining fashion to consumers about our history, products, special events, promotions and store locations, while allowing us to receive and respond directly to customer feedback.
As part of these initiatives, we currently have loyalty programs in North America, Europe and Asia covering all of our brands. The programs are designed to reward our members by earning points for purchases that can be redeemed on future purchases either in our stores or online. In addition to earning rewards with the program, our loyalty members may receive other benefits including invitations to special VIP events in our stores, double points during their birthday month and access to seasonal savings, depending on their purchasing tier. Our Guess List loyalty program has experienced growth in its overall member engagement numbers through the introduction of experiential rewards and unique member content. The programs are also used to promote new products to our customers which in turn increases traffic in the stores and online. The loyalty programs generate substantial repeat business that might otherwise go to competing brands. We continue to enhance our loyalty program offerings by understanding our members’ interests and needs by strategically marketing to this large and growing customer base.
Quality Control
Our quality control program is designed to ensure that products meet our high-quality standards. We test the quality of our raw materials prior to production and inspect prototypes of each product before production runs commence. We also perform random in-line quality control checks during and after production before the garments leave the contractor. Final random inspections occur when the garments are received in our distribution centers. We believe that our policy of inspecting our products is important to maintain the quality, consistency and reputation of our products. We have an on-site quality assurance collaboration with an external expert provider for a large portion of our European and North American purchase orders. During fiscal 2022, we continued to expand the program for additional purchase orders in Europe and North America. The objective is to stop product quality issues at the origin before investing in the transportation of the goods to the final destinations.
Product Integrity and Testing Protocol
During fiscal 2022, we published new protocols covering all our major regions, which provide minimum product integrity and other testing for apparel, footwear, accessories and handbags to help ensure our products continue to meet or exceed our customers’ expectations.
Logistics
We utilize distribution centers at strategically located sites. Our U.S. distribution center is based in Louisville, Kentucky, where we use fully integrated and automated distribution systems. The bar code scanning of merchandise and distribution cartons, together with radio frequency communications, provide timely, controlled, accurate and instantaneous updates to our distribution information systems. Distribution of our products in Canada is handled primarily from our operated distribution centers in Montreal, Quebec. In Europe, distribution of our products is handled primarily by third-party distributors through distribution facilities in Italy, the Netherlands and Poland. We also utilize smaller distribution facilities throughout Europe. We utilize several third-party operated distribution warehouses that service the Asia region.
During fiscal 2022, we were impacted by delays due to the logistic disruptions occurring throughout our markets. In an effort to minimize these delays, remain agile and provide flexibility, we utilized several forwarders to avoid congestion and additional delays.
Competition
The apparel industry is highly competitive and fragmented and is subject to rapidly changing consumer demands and preferences. We believe that our success depends in large part upon our ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner and upon the continued appeal to consumers of the GUESS? brand. We compete with numerous apparel retailers, manufacturers and distributors, both domestically and internationally, as well as several well-known designers. Our licensed apparel and accessories also compete with a substantial number of well-known brands. Although the level and nature of competition differs among our product categories and geographic regions, we believe that we differentiate ourselves from our competitors by offering a global lifestyle brand on the basis of our global brand image and wide product assortment comprising both apparel and accessories. We also believe that our geographic diversification, multiple distribution channels and multiple store concepts help to set us apart from our competition.
Information Systems
We believe that high levels of automation and technology are essential to maintain our competitive position and support our strategic objectives. We continue to invest in new technologies and update computer hardware, network infrastructure, system applications and cyber security. Our computer information systems consist of a full range of financial, distribution, merchandising, point-of-sales, customer relationship management, supply chain, digital platform, enterprise resource planning and other systems. During fiscal 2022, we improved and stabilized our digital platforms, implemented more payment methods, redesigned our web front, expanded our shopping channels, enhanced our omni-channel experience and continued to develop mobile-based initiatives to support our wholesale and direct-to-consumer businesses. Other customer-focused initiatives included implementing Wi-Fi in store customer access, shortening card payment processing time, improving mobile point of sale check out, and continuing the implementation of Salesforce Customer 360, endless aisle. We are also continuing to enhance our product life cycle management and supply chain tracking system and to enhance and align our IT standards globally to accommodate future growth and provide operational efficiencies.
Trademarks
We own numerous trademarks, including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, MARCIANO, Question Mark and Triangle Design, a stylized G and a stylized M, GUESS Kids, Baby GUESS, YES, G by GUESS, GbG, GUESS by MARCIANO and Gc. As of January 29, 2022, we had over 5,100 trademarks in the U.S. and internationally registered trademarks or trademark applications pending with the trademark offices in over 175 countries around the world, including the U.S. From time-to-time, we adopt new trademarks in connection with the marketing of our product lines. We consider our trademarks to have significant value in the marketing of our products and act aggressively to register and protect our trademarks worldwide.
Like many well-known brands, our trademarks are subject to infringement. We have staff devoted to the monitoring and aggressive protection of our trademarks worldwide.
Seasonality
Our business is impacted by the general seasonal trends characteristic of the apparel and retail industries. The retail operations in the Americas and Europe are generally stronger during the second half of the fiscal year, and the wholesale operations in the Americas generally experience stronger performance from July through November. The European wholesale businesses operate with two primary selling seasons: the Spring/Summer season, which ships from November to April and the Fall/Winter season, which ships from May to October. We may take advantage of early-season demand and potential reorders in its European wholesale business by offering a pre-collection assortment which ships at the beginning of each season. Customers retain the ability to request early shipment of backlog orders or delay shipment of orders depending on their needs.
Human Capital
Since our founding, we have been a company that welcomes all, both within our own operations and in our supply chain. As of January 29, 2022, with an inclusive culture and a commitment to empowering our people, we provide opportunities for approximately 12,500 associates, both full and part-time, consisting of approximately 4,500 in the U.S. and 8,000 in foreign countries. From our innovative product designers and developers working behind the scenes, to our dynamic retail store associates—and everyone in between—we are committed to making sure their diverse voices are valued, ideas are elevated, and excellence is rewarded.
Celebrating Diversity and Inclusion
Our longstanding commitment to diversity and inclusion comes to life each day as we work together to maintain a fair and inclusive workplace. Our aim is for all GUESS? associates to feel comfortable and safe bringing their whole selves to work and contributing fully to our shared success. Building on the example set by the Marciano brothers and their belief that a diverse organization was a strong and creative one, we have embedded diversity and inclusion principles and practices throughout the Company. Over nearly 40 years, this has created a rich, vibrant culture that respects, and benefits from, different personal attributes, backgrounds, ideas, and perspectives. Today, diversity is a key facet of our company-wide culture, informing our values, recruiting, talent development, and associate advancement, among other operations.
Our expectations of everyone at GUESS? to support a diverse and welcoming workplace are spelled out in the GUESS?, Inc. Code of Ethics. We expect all at GUESS? to promptly report and investigate concerns about possible discrimination, as appropriate, and to facilitate this, we maintain an open-door policy that fosters honest and open communication. GUESS? associates are encouraged to discuss work-related concerns or issues with their manager, department head, Human Resources, or Executive Management without fear of repercussion. In addition, our global whistle-blower hotline allows associates to report concerns about unethical behavior or other potential conflicts.
Cultivating Diversity, Equity, and Belonging through Focused Council
In 2018, segmentwe launched our Diversity & Inclusion Council (the “Council”), which is integrated throughout our business. The Council aims to foster a workplace in which employees enjoy a sense of community, belonging, and opportunity for dialogue. The Council also serves as a resource for internal associates, offers guidance on communication and community engagement, and assists with communication with Executive Management and the GUESS?, Inc. Board of Directors.
With the help of the Council, our diversity and inclusion efforts focus on inclusive leadership, employee training, and a work environment that promotes growth and opportunity for all. Initiatives include training for associates and managers, community support, greater diversity in advertising and marketing, celebrations of multicultural and inclusive holidays, and training and compliance programs in our supply chain, among others.
Learning and Development
We are committed to the growth and development of our employees and offer a wide range of training programs for all levels. In addition to receiving ongoing on-the-job training and coaching, our employees can build skills and prepare for the future through our HR training portal. In fiscal 2022, we added new courses and trainings, many of which focus on remote working skills, as well as diversity and inclusion education. We also support learning beyond our walls through tuition assistance. These collective learning and development programs help foster career mobility for our employees, while simultaneously allowing us to fill open positions with existing employees who know our company best.
Employee Safety and Well-Being
We are committed to the safety, health, and overall well-being of each of our employees and their families, providing a wide array of physical, emotional and social support. Our GUESS Wellness 360 online portal offers our employees physical and mental wellness support using challenges, contests, and prizes.
Throughout the COVID-19 pandemic, our priority has been to ensure the safety and well-being of all of our employees, customers, and the communities in which we operate around the world. In this regard, we have implemented new health and safety protocols in our stores, distribution centers, and corporate offices, with several locations offering free COVID-19 testing and vaccinations.
Compensation and Benefits
We are committed to providing competitive compensation and benefits to attract and retain a diverse and talented workforce. We are also committed to maintaining pay equity throughout our organization, conducting annual assessments.We offer a wide array of both employer-paid and employee-paid benefits to support our employees' overall financial, physical, and mental well-being, including, but not limited to, healthcare, retirement savings, paid time off, temporary leave, and flexible work arrangements. We also provide our employees a merchandise discount on most of our products.
Sustainability and Climate Change
In fiscal 2022, we released our latest sustainability report entitled VISION GUESS, our fourth sustainability report covering fiscal 2021 and fiscal 2020, written in accordance with standards of the Global Reporting Initiative (“GRI”) and Sustainable Accounting Standards Board (“SASB”). The publication of VISION GUESS is a milestone achievement for us, marking the successful completion of a reasonable assurance engagement examining the metrics and disclosures in this sustainability report.
The sustainability report shares our significant progress on Environmental, Social, and Governance (ESG) topics since our first sustainability plan launched in 2016. The sustainability report also provides information about our current and future activities which includes, among others, reducing greenhouse gas (“GHG”) emissions with Science Based Targets, transitioning away from virgin polyester to recycled materials, and continuing our commitment to circular fashion.
The VISION GUESS Sustainability report is available at http://sustainability.guess.com. This site provides information on our policies, social impact and environmental programs, as well as our sustainability strategy, data and reporting. The information contained on, or that may be accessed through, our websites is not incorporated by reference into, and is not a part of, this Annual Report.
Strengthening Sustainability Oversight
We are committed to good governance and sustainability oversight at every level, ethics in every business facet, and transparency in sustainability reporting. During fiscal 2022, we further engaged with the Board of Directors on ESG priorities, risks, and opportunities. We continue to ensure all operations and businesses are conducted ethically, both with internal personnel and external business partners, and all of our directors, officers, and associates are held to our Code of Ethics.
Additionally, in the VISION GUESS sustainability plan, we committed to connecting ESG priorities with business performance incentive and evaluation metrics. Our Sustainability and Corporate Social Responsibility Team ensures the environmental and social responsibility is embedded into decision-making processes. In addition, we have implemented a rigorous internal auditing program, covering our sustainability metrics and performance data to ensure complete, accurate, and balanced sustainability reporting. With our continuous effort, fiscal 2021 and fiscal 2020 mark the first time we completed a reasonable assurance examination indicating our sustainability report was prepared in accordance with the GRI and the SASB.
Protecting Our Environment
We are committed to protecting our environment and addressing climate change issues through product responsibility, water stewardship, and GHG emissions reduction. We understand sustainably sourced materials are the key to ensuring product responsibility. Lifecycle analyses have shown that fiber and fabric production make up about half of our apparel’s environmental impact. To that end, we have been working with our vendors to incorporate more sustainable materials and practices. By setting sustainability goals to increase use of responsible materials and promote circular fashion, and by following the GUESS Eco material sourcing guide, we source over 12% sustainable materials across all brands in our global portfolio, and also continue to source a portion of our cotton as Better Cotton.
As part of our commitment to protect our environment, we aim to ensure that animal-derived material used in our products upholds our commitment to the ethical and humane treatment of animals. Through the GUESS Animal Welfare Policy, guided by international best practice in accordance with “The Five Freedoms for Animal Welfare” by the Farm Animal Welfare Council, our suppliers are prohibited from using any fur, mohair, angora,
exotic leather or any other parts from vulnerable, endangered, or wild-caught species. The use of feathers and downs or other animal derived hair is subject to limitation and use with caution.
Historically, denim production factories require the use of many chemicals, which could impact a factory’s wastewater discharge. In fiscal 2019, we established the GUESS Water Action Plan to address each phase of the denim lifecycle to prioritize water savings and improve water quality while providing water education and community engagement. Some of our suppliers have adopted innovative technologies, including Dry Indigo®, a foam for dyeing denim a deep blue without using water and e-flow for reducing water and chemicals in the finishing process. With our commitments in adopting water-saving denim technology and managing environmental impacts in our supply chain, over 20% of our denim meets our GUESS Eco guidelines and approximately 75% of our key laundries completed the Higg Facility Environmental Module (“Higg FEM”) survey.
Our strategy in managing GHG emissions includes meeting our carbon footprint goals and setting Science Based Targets. In fiscal 2021, we achieved our goal from our first sustainability plan of over 15% GHG emissions reduction per square foot from direct operations. We are now pursuing our Science Based Targets for GHG emissions, which were approved by the Science Based Targets Initiative in fiscal 2021. We remain committed to a 50% reduction of absolute Scope 1 and 2 emissions, as well as an ambitious reduction of absolute Scope 3 emissions by 2030. In fiscal 2022, we purchased renewable energy, solar and wind in the Americas, Europe and Asia, equivalent to power approximately 20% of our stores globally. We will continue implementing a variety of energy efficiency and renewable energy strategies and working with our key vendors to make sure they have such plans in place.
Government Regulations
As a company with global operations, we are subject to various federal, state, local and foreign laws, regulations and ordinances. Compliance with these laws, regulations and ordinances has not had, and is not expected to have, a material impact on our earnings, competitive position or capital expenditures.
Website Access to Our Periodic SEC Reports
Our investor website can be found athttp://investors.guess.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act, are available at our investor website, free of charge, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, the charters of our Board of Directors’ Audit, Compensation and Nominating and Governance Committees, as well as the Board of Directors’ Governance Guidelines and our Code of Ethics are posted on our investor website. Printed copies of these documents may also be obtained by writing or telephoning us at: Guess?, Inc., 1444 South Alameda Street, Los Angeles, California 90021, Attention: Investor Relations, (213) 765-5578.
We have included our Internet website addresses throughout this filing as textual references only. The information contained within these websites is not incorporated into this Annual Report on Form 10-K.
ITEM 1A. Risk Factors.
You should carefully consider the following factors and other information in this Annual Report on Form 10‑K. Additional risks which we do not presently consider material, or of which we are not currently aware, may also have an adverse impact on us. The information discussed below is at the time of this filing. Please also refer to “Important Factors Regarding Forward-Looking Statements” on page (ii) of this Form 10-K.
Risks Related to Operating a Global Business
Our business is global in scope and can be impacted by factors beyond our control.
As a result of our large and growing international operations, we face the possibility of greater losses from risks inherent in doing business in international markets and from factors beyond our control. Such factors that could harm our results of operations and financial condition include, among other things: (i) political instability, war or acts of terrorism, which disrupt trade with the countries where we operate or in which our contractors, suppliers or customers are located; (ii) recessions and volatility in foreign economies, including the economic impact of the ongoing COVID-19 pandemic; (iii) reduced global demand in our industry resulting in the closing of manufacturing facilities; (iv) challenges in managing dispersed foreign operations; (v) local business practices that do not conform to our legal or ethical guidelines; (vi) adoption of additional or revised quotas, restrictions or regulations relating to imports or exports; (vii) additional or increased customs duties, tariffs, taxes and other charges on imports or exports; (viii) anti-American sentiment in foreign countries where we operate resulting from actual or proposed changes to U.S. immigration and travel policies or other factors; (ix) delays in receipts due to our distribution centers as a result of labor unrest, increasing security requirements or other factors at U.S. or other ports; (x) fluctuations in the value of the dollar against foreign currencies; (xi) increased difficulty in protecting our intellectual property rights in foreign jurisdictions; (xii) social, labor, legal or economic instability in the foreign markets in which we do business, which could influence our ability to sell products in, or distribute products from, these international markets; (xiii) restrictions on the transfer of funds between the U.S. and foreign jurisdictions; (xiv) our ability and the ability of our international retail store licensees, distributors and joint venture partners to locate and continue to open desirable new retail locations; and (xv) natural disasters or public health crises in areas in which our contractors, suppliers, or customers are located.
Further, our international presence means we are subject to certain U.S. laws, including the Foreign Corrupt Practices Act, as well as the laws of the foreign countries in which we operate, including data privacy laws. If any of our international operations, or our employees or agents, violates such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results.
Our business may also be affected by new sanctions and export controls targeting Russia and other responses to Russia's invasion of Ukraine.
As a result of Russia's invasion of Ukraine, the United States, the United Kingdom and the European Union governments, among others, have developed coordinated sanctions and export-control measures. Based on the public statements to date, these measures include: (i) comprehensive financial sanctions against major Russian banks; (ii) additional designations of Russian individuals with significant business interests and government connections; (iii) designations of individuals and entities involved in Russian military activities; and (iv) enhanced export controls and trade sanctions targeting Russia's import of various goods. We currently operate in Russia through our wholesale, retail and e-commerce channels and have 70% ownership of a joint venture. We do not have contracts or other relationships with Russian banks, and Russian sales in our wholesale channel are primarily conducted either in cash in advance, with a bank guarantee or with insurance coverage. While we have no direct presence in Ukraine, we operate with a local distributor in Ukraine. Slightly less than 3% of our revenues for fiscal 2022 were generated from sales in these regions. The imposition of enhanced export controls and economic sanctions on transactions with Russia and Russian entities could prevent us from performing existing contracts or pursuing new business opportunities or maintaining adequate insurance coverage to protect our products and facilities. Additionally, the conflict in Ukraine could disrupt the operations of our distributor in that region and surrounding regions. Any of the foregoing could adversely affect our business, supply chain, partners or customers. In addition, the conflict between Russia and Ukraine could lead to disruption, instability and volatility in global markets and industries that could negatively impact our operations. The scope of the impact of sanctions, export controls and the ongoing conflict in Ukraine is impossible to predict at this time, and could have an adverse impact on our business.
Currency fluctuations could adversely impact our financial condition, results of operations and earnings.
Since the majority of our international operations are conducted in currencies other than the U.S. dollar (primarily the British pound, Canadian dollar, Chinese yuan, euro, Japanese yen, Korean won, Mexican peso, Polish zloty, Russian rouble and Turkish lira), currency fluctuations can have a significant impact on the translation of our international revenues and earnings (loss) into U.S. dollars. These amounts could be materially affected by the strengthening of the U.S. dollar, negatively impacting our results of operations, earnings and our ability to generate revenue growth. Furthermore, our products are typically sourced in U.S. dollars and the cost of these products may be affected by changes in the value of the applicable local currencies. Changes in currency exchange rates may also adjustedaffect the U.S. dollar value of the foreign currency denominated prices at which our international businesses sell products. Our future financial results could be significantly affected by the value of the U.S. dollar in relation to excludethe foreign currencies in which we conduct business, and the speed at which these fluctuations occur. For example, recent sanctions imposed in response to Russia’s invasion of Ukraine, and subsequent downgradings by Fitch and Moody’s of Russia’s sovereign debt to “junk” status, have resulted in record lows of the Russian rouble against the U.S. dollar. If the U.S. dollar strengthens relative to the respective fiscal 2022 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results, as well as our international cash and other balance sheet items during fiscal 2023, particularly in Canada, Europe (primarily the euro, British pound, Turkish lira and Russian rouble) and Mexico.
Although we hedge certain exposures to changes in foreign currency exchange rates, we cannot assure that foreign currency fluctuations will not have a material adverse effect on our financial condition or results of operations. Furthermore, since some of our hedging activities are designed to reduce volatility of fluctuating exchange rates, they not only reduce the negative impact of a stronger U.S. dollar, but they also reduce the positive impact of a weaker U.S. dollar. In addition, while our foreign currency hedges are designed to reduce volatility over the forward contract period, these contracts can create volatility during the period. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities.
Abnormally harsh or unseasonable weather conditions, including as a result of climate change or power outage, could have a material adverse impact on our sales, inventory levels and operating results.
Extreme weather conditions in areas in which our retail stores and wholesale doors are located, particularly in markets where we have a concentration of locations, could adversely affect our business. For example, heavy snowfall, rainfall or other extreme weather conditions, such as hurricanes or deep freezes, might make it difficult for our staff and customers to travel to our stores and thereby reduce our sales and profitability. Our business is also susceptible to unseasonable weather conditions, including conditions resulting from climate change. For example, extended periods of unseasonably warm or prolonged periods of unseasonably cold temperatures during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with those unseasonable conditions. Reduced sales from extreme or prolonged unseasonable weather conditions could have a material adverse effect on our results of operations, financial condition and cash flows.
Our results of operations could be affected by natural events in the locations in which we or our customers or suppliers operate.
Our corporate performance-based compensationheadquarters, as well as other key operational locations, including retail, distribution and warehousing facilities, are in areas subject to natural events such as severe weather and geological events or public health crises that could disrupt our operations. Many of our suppliers and customers also have operations in these locations. The occurrence of such natural events may result in sudden disruptions in business conditions of the local economies affected, as well as of the regional and global economies. Such disruptions could result in store closures, decreased demand for our products and disruptions in our management functions, sales channels and manufacturing and distribution networks, which could have a material adverse effect on our business, financial condition and results of operations. The ongoing COVID-19 pandemic had a material impact on our financial performance. The pandemic is ongoing and dynamic in nature, including as a result of regional surges, the spread of virus variants and the timing and efficacy of vaccines and other treatments. To date, we have experienced temporary closures in key regions globally, along with other major retailers. In addition, retail stores have experienced significant reductions in traffic and therefore, revenue. The extent and duration of the COVID-19 pandemic remains uncertain and may continue to have significant negative impacts to all aspects of our business and results of operations in future periods, which may materially impact our financial performance. Our business may also be adversely impacted by future epidemics, pandemics or other contagious disease outbreaks, the impacts of which are impossible to predict at this time.
Future changes to U.S. income tax or trade policies impacting multi-national companies could materially affect our financial condition and results of operations.
During fiscal 2022, we sourced most of our finished products with partners and suppliers outside the U.S. and we continued to design and purchase fabrics globally, with most coming from China. In addition, we have increased our sales of product outside of the U.S. In fiscal 2022, approximately 71% of our consolidated net product sales was generated by sales from outside of the U.S. In the long-term, we anticipate these international revenues will continue to grow as a percentage of our total business. The current political landscape has introduced greater uncertainty with respect to future income tax and trade regulations for U.S. companies with significant business and sourcing operations outside the U.S.
The ongoing economic conflict between the U.S. and China has resulted in increased tariffs being imposed on goods we import from China. We have been reducing our dependency on China sourcing, particularly for our U.S. business, and mitigating potential tariffs’ risks without compromising the quality of our products, while improving costs. However, we cannot predict whether, and to what extent, there may be changes to international trade agreements, such as those with China, or whether quotas, duties, tariffs, exchange controls or other restrictions will be changed or imposed by the U.S. or by other countries. If we or our vendors or product licensees are unable to obtain raw materials or finished goods from the countries where we or they wish to purchase them, either because of such regulatory changes or for any other reason, or if the cost of doing so should increase, it could have a material adverse effect on our results of operations and financial condition.
As a result of Russia's invasion of Ukraine, the United States, the United Kingdom and the European Union governments, among others, have developed coordinated sanctions and export-control measures. These sanctions and export-control measures imposed are expected to significantly disrupt our sales in these regions. If the disruptions continue over a prolonged period, our results of operations will be impacted. For further information regarding the risks we face relating to Russia’s invasion of Ukraine, refer to “—Our business may also be affected by new sanctions and export controls targeting Russia and other responses to Russia's invasion of Ukraine.”
Errors in our assumptions, estimates and judgments related to tax matters, including those resulting from regulatory reviews, could adversely affect our financial results.
We are subject to routine tax audits on various tax matters around the world in the ordinary course of business (including income tax, business tax, customs duties, sales and use tax, and value added tax (“VAT”) matters). We regularly assess the adequacy of our uncertain income tax positions and other reserves, which requires a significant amount of judgment. Although we accrue for uncertain income tax positions and other regulatory audits, negotiations with taxing and customs authorities may lead to adjustments in excess of our accruals, resulting in liabilities for additional taxes, duties, penalties and interest. During the quarter ended October 30, 2021, we completed an intra-entity transfer of intellectual property rights from a U.S. entity to a wholly-owned Swiss subsidiary to more closely align our intellectual property rights with our business operations. The transactions resulted in a U.S. income tax expense that was substantially offset by the recognition of a deferred income tax asset in the Swiss subsidiary. We cannot be certain that this transfer will not lead to any unanticipated income tax consequences which could harm our financial results. In addition, the income tax impact to us in connection with an intra-entity intellectual property transfer depends on the fair value determination of the intellectual property rights which determination requires management to make significant estimates and to apply complex tax regulations in multiple jurisdictions. Tax authorities may challenge our fair value determinations which could adversely impact the income tax benefits we expect to realize as a result of the transfer. Refer to “Part IV. Financial Statements – Note 12 – Income Taxes” in this Form 10-K for disclosures about our income tax matters, including reserves for uncertain tax positions.
From time-to-time, we make VAT and other tax-related refund claims with various foreign tax authorities that are audited by those authorities for compliance. Failure by these authorities to approve or ultimately pay these claims could have a material adverse effect on our results of operations and liquidity.
Changes in income tax laws, significant shifts in the relative source of our earnings, or other unanticipated income tax liabilities could adversely affect our effective income tax rate and profitability and may result in volatility in our financial results.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Income tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change. We record income tax expense based on our estimate of future payments, which includes reserves for uncertain tax positions in multiple
tax jurisdictions and requires significant judgment in evaluating and estimating our provision and accruals. Our effective income tax rate in the future could be affected by a number of other factors, including: the outcome of income tax audits in various jurisdictions, changes in our stock price, the resolution of uncertain tax positions and changes in our operating structure. We and our subsidiaries are engaged in intercompany transactions across multiple tax jurisdictions. Although we believe these transactions reflect arm’s length terms and the proper transfer pricing documentation is in place, these transfer pricing terms and conditions may be scrutinized by local tax authorities during an audit and any resulting changes may impact our mix of earnings in countries with differing statutory tax rates. In addition, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, as well as losses in jurisdictions where we are unable to realize the related tax benefits, can create volatility in our effective income tax rate. In particular, the income tax benefits associated with our transfer of intellectual property to our wholly-owned Swiss subsidiary during the quarter ended October 30, 2021 are sensitive to future profitability and taxable income in Switzerland, audit assessments and changes in applicable tax law. Any one of these factors could adversely impact our income tax rate and our profitability and could create ongoing variability in our quarterly or annual tax rates.
The Organization for Economic Co-operation and Development (OECD), an international association comprised of 36 countries, including the United States, has made changes to numerous long-standing income tax principles. There can be no assurance that these changes, once adopted by countries, will not have an adverse impact on our provision for income taxes.
Risks Related to our Business Strategy
If we fail to successfully execute growth initiatives, including acquisitions and alliances, our business and results of operations could be harmed.
We regularly evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives.
These efforts place increased demands on our managerial, operational and administrative resources that could prevent or delay the successful opening of new stores and the identification of suitable licensee partners, adversely impact the performance of our existing stores and adversely impact our overall results of operations. In addition, acquired businesses and additional store openings may not provide us with increased business opportunities as consumer preferences for in-person shopping has shifted to online shopping due to the COVID-19 pandemic, or result in the growth we anticipate, particularly during economic downturns. Furthermore, integrating acquired operations (including existing licensees or joint venture partners) is a complex, time-consuming and expensive process. Failing to acquire and successfully integrate complementary businesses, or to achieve the business synergies or other anticipated benefits of acquisitions or joint ventures, could materially adversely affect our business and results of operations.
We may be unsuccessful in implementing our plans to open and operate new stores, which could harm our business and negatively affect our results of operations.
New store openings have historically been an important part of the growth of our business. To open and operate new stores successfully, we must: (i) identify desirable locations, the availability of which is out of our control; (ii) negotiate acceptable lease terms, including desired tenant improvement allowances; (iii) efficiently build and equip the new stores; (iv) source sufficient levels of inventory to meet the needs of the new stores; (v) hire, train and retain competent store personnel; (vi) successfully integrate the new stores into our existing systems and operations; and (vii) satisfy the fashion preferences of customers in the new geographic areas.
Any of these challenges could delay our store openings, prevent us from completing our store opening plans or hinder the operations of stores we open. These challenges could be even more pronounced in foreign markets due to unfamiliar local regulations, business conditions and other factors. Once open, we cannot be sure that our new stores will be profitable. Unfavorable economic and business conditions and changing consumer preferences could also interfere with our store opening plans.
Failure to successfully develop and manage new store design concepts could adversely affect our business.
The introduction and growth or maintenance of new store design concepts as part of our growth and productivity strategies could strain our financial and management resources and is subject to a number of other risks, including customer acceptance, product differentiation, competition and maintaining desirable locations. These risks may be compounded during difficult economic climates or future economic downturn. There can be
no assurance that new store designs will achieve or maintain sales and profitability levels that justify the required investments. If we are unable to successfully develop new store designs, or if consumers are not receptive to the products, design layout, or visual merchandising, our results of operations and financial results could be adversely affected. In addition, the failure of new store designs to achieve acceptable results could lead to unplanned store closures and/or impairment and other charges, which could adversely affect our results of operations and growth.
We may not fully realize expected cost savings and/or operating efficiencies related to cost-saving initiatives.
We have identified several areas that present opportunities for future cost savings and efficiencies, including improved working capital management, distribution, systems integration and development, supply chain, retail store rent relief efforts, store closure opportunities, and other initiatives, based on a number of assumptions and expectations which, if achieved, would improve profitability and cash flows from operating activities. However, there can be no assurance the expected results will be achieved. These and any future spend reductions, if any, may also negatively impact other initiatives or efforts to grow our business, which may negatively impact future results of operations and increase the burden on existing management, systems and resources. In addition, these cost savings may be negated or offset by unexpected or increased costs net gains (losses)and poorer performance in other areas of the business.
Risks Related to Macroeconomic Conditions
The COVID-19 pandemic has had, and may continue to have, adverse effects on lease terminationsour financial condition and results of operations, and other similar pandemics could also adversely affect our business.
Our business has been, and may continue to be, materially adversely affected by the COVID-19 pandemic (including new variants of the virus). In connection with the COVID-19 pandemic, we have experienced disruptions and restrictions on travel, temporary closures of our stores, office buildings and the facilities of our wholesale customers or suppliers, labor shortages, disruptions in shipments and negative impacts to pricing of certain product components. The COVID-19 pandemic has also adversely affected the economies and financial markets of many countries, the extent and duration of which is unclear at this time.
The impacts of the COVID-19 pandemic have been broad reaching, including impacts to our retail, wholesale and licensing businesses. The pandemic has impacted our business globally, with significant temporary store closures and materially lower traffic at open stores, especially during periods of surges in COVID-19 outbreaks in geographies where our stores are located. The COVID-19 pandemic has also impacted, and is expected to continue to impact, the Asia region, which is the source of most of our goods. Temporary factory closures and the pace of workers returning to work could further impact our suppliers’ ability to source raw materials and to timely produce and fulfill finished goods orders. We have also experienced modest impacts on delays in deliveries, driven primarily by factory labor shortages and port congestion. The ability of our distribution and logistics providers to operate may be further impacted depending on the continued severity and duration of the COVID-19 pandemic and may have a significant impact on the cost and timing of receipts for future seasons. The occurrence of any of these events could further negatively impact our future consolidated financial position, results of operations and cash flows.
The extent of the impact of the COVID-19 pandemic will depend largely on future developments, including the duration of the outbreak and the occurrence of additional waves of infections in the United States and globally, the extent of any economic recession resulting from the pandemic, the effectiveness and speed of vaccination distribution, the related impacts on consumer confidence and spending, potential future government restrictions on retail operations and the willingness of customers to visit malls and shopping centers, the willingness of employees to staff our stores and fulfillment centers, and when, or if, we will be able to resume normal operations, all of which are highly uncertain and cannot be predicted. There could be a prolonged impact on our business due to slow economic recovery or changes in consumer behavior. We currently anticipate that we will be able to satisfy our ongoing cash requirements during the next 12 months primarily with cash flow from operations and existing cash balances as supplemented by borrowings under our existing Credit Facilities. However, if we have sustained decrease in consumer demand related to the COVID-19 pandemic, we may require access to additional credit. There is no guarantee we will be able to obtain additional credit or extend or refinance our existing borrowing agreements. The results for the first quarter of fiscal 2023, as well as full fiscal 2023, could also be impacted by the COVID-19 pandemic in ways we cannot predict today, including, but not limited to, non-cash write-downs and asset impairment charges due(including impairments on property and equipment, operating lease
right-of use assets and goodwill); unrealized gains or losses related to investments; foreign currency fluctuations; and collections of accounts receivables.
Our business may also be impacted by future outbreaks of other contagious diseases, which could cause similar disruptions in our business, and may impact our operations in ways that are impossible to predict at this time.
Slowing customer traffic in malls or outlet centers could significantly reduce our sales, increase pressure on our margins and leave us with excess inventory.
Unfavorable economic conditions, changing shopping patterns, including significant increases in e-commerce sales, which have accelerated during the fact that these items are no longer includedCOVID-19 pandemic, changing demographic patterns and other factors have adversely affected customer traffic in mall and outlet centers. This, in turn, has resulted in significant pricing pressures and a highly promotional retail environment in the segment results providedapparel sector. Should these trends continue or worsen, or should we fail to effectively market our products in these conditions, it could negatively impact our sales, increase pressure on our margins, leave us with excess inventory, cause a decline in profits and negatively impact our liquidity.
Failure to successfully develop an omnichannel shopping experience could have a material adverse impact on our business.
As e-commerce sales continue to grow and evolve, our customers increasingly interact with us through a variety of media including smart phones and tablets, and expect seamless integration across all touchpoints. Our success depends on our ability to respond to shifting consumer traffic patterns and ability to engage our customers.
While we must keep up to date with emerging technology trends in the Company’s chief operating decision makerretail environment in order to allocatedevelop a successful omnichannel shopping experience, it is possible these initiatives may not prove to be successful, may increase our costs, may not succeed in driving sales or attracting customers and could result in significant investments that do not provide the anticipated benefits or desired rates of return.
In addition, digital operations are subject to numerous risks, including reliance on third-party computer hardware and software and service providers, data breaches, violations of state, federal or international laws, including those relating to online privacy, credit card fraud, telecommunication failures and electronic break-ins and similar disruptions, and disruption of internet service. Changes in U.S. or foreign regulations may also negatively impact our ability to deliver product to our customers. Failure to successfully respond to these risks may adversely affect sales as well as damage the reputation of our brands.
Poor or uncertain economic conditions, and the resulting negative impact on consumer confidence and spending, have had and could in the future have an adverse effect on our business.
The apparel industry is cyclical in nature and is particularly affected by adverse trends in the general economy. Purchases of apparel and related merchandise are generally discretionary and, therefore, tend to decline during periods of economic uncertainty and recession, but may also decline at other times. Over the last several years, volatile economic conditions and uncertain market conditions in many markets around the world have resulted in cautious consumer spending. For example, a number of European countries experienced difficult economic conditions, including sovereign debt issues that negatively impacted the capital markets. These conditions resulted in reduced consumer confidence and spending in many countries in Europe, particularly Southern Europe. While these conditions have improved, if conditions in Europe, or other economic regions in which we do business, worsen or fail to further improve, there will likely be a negative impact on our business, prospects, operating results, financial condition and cash flows.
There are a number of other factors that could contribute to reduced levels of consumer spending, such as increases in interest rates, currency fluctuations, inflation, unemployment, consumer debt levels, inclement weather, tax, net worth reductions based on market declines or uncertainty, energy prices and austerity measures. Similarly, natural disasters, labor unrest, actual or potential terrorist acts, public health crises, including the COVID-19 pandemic or other similar pandemics, global trade, immigration policies, geopolitical unrest and other conflicts can also create significant instability and uncertainty in the world, causing consumers to defer purchases and travel, or prevent suppliers and service providers from providing required services or materials to us. These or other factors could materially and adversely affect our business, prospects, operating results, financial condition and cash flows.
Significant fluctuations and volatility in the price of various input costs, including, but not limited to, cotton and oil-related materials, utilities, fuel, freight and wages may have a material adverse effect on our business, results of operations, financial condition and cash flows.
Inflation can have a long-term impact on us because increasing input costs may impact our ability to maintain satisfactory margins. For example, we have recently experienced significant inflation in labor, materials and shipping costs. The cost of the materials that are used in our manufacturing process, such as oil-related commodity prices and other raw materials, including cotton, dyes and chemicals, and other costs, such as fuel, energy and utility costs, can fluctuate as a result of inflation, the current situation in Russia and other factors. Similarly, a significant portion of our products are manufactured in other countries and declines in the value of the U.S. dollar may result in higher manufacturing costs. In addition, sudden decreases in the costs for materials may result in the cost of inventory exceeding the cost of new production, which could result in lower profitability, particularly if these decreases result in downward price pressure. If, in the future we incur volatility in the costs for materials, labor and freight that we are unable to offset through price adjustments or improved efficiencies, or if our competitors’ unwillingness to follow our price changes results in downward price pressure, our business, results of operations, financial condition and cash flows may be adversely affected.
Fluctuations in the price or availability of quality raw materials and commodities could increase costs and negatively impact profitability.
The raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high demand for fabrics, currency fluctuations, crop yields, weather patterns, climate change, supply conditions, government regulations (including tariffs), labor conditions, energy costs, transportation or freight costs, economic climate, public health crises, market speculation and other unpredictable factors. Negative trends in any of these conditions or our inability to appropriately project fabric requirements could increase costs and negatively impact profitability.
Risks Related to Brand Reputation, Relevance and Protection
Demand for our merchandise may decrease and the appeal of our brand image may diminish if we fail to identify and rapidly respond to consumers’ fashion tastes.
The apparel industry is subject to rapidly evolving fashion trends and shifting consumer demands. Accordingly, our brand image and profitability are heavily dependent upon the priority our customers place on fashion and our ability to anticipate, identify and capitalize upon emerging fashion trends. If we fail to anticipate, identify or react appropriately, or in a timely manner, to fashion trends (including as a result of our recent shift to a single global line of apparel), we could experience reduced consumer appeal and a diminished brand image. These factors could result in higher wholesale markdowns, lower average unit retail prices, lower product margins and decreased sales volumes and could have a material adverse effect on our results of operations and financial condition.
Our inability to protect our reputation could have a material adverse effect on our brand.
Our ability to maintain our reputation is critical. Our reputation could be jeopardized if we or our third-party providers fail to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure by us or our third-party providers to comply with ethical, social, product, labor, health and safety or environmental standards could also jeopardize our reputation and potentially lead to adverse consumer actions, including boycotts. They could also impact investment decisions by investors, including some large institutional investors and funds, which could negatively impact our stock price. With the increased proliferation of social media, public perception about products, business practices, stores or brand, whether justified or not, could impair our reputation, involve us in litigation, damage our brand and have a material adverse effect on our business. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations and financial condition, as well as require additional resources to rebuild our reputation.
We depend on our intellectual property, and assess performance.our methods of protecting it may not be adequate.
Our success and competitive position depend significantly upon our trademarks and other proprietary rights. We take steps to establish and protect our trademarks worldwide. Any precautions we may take to protect our intellectual property, policing unauthorized use of our intellectual property is difficult, expensive and time consuming. We may be unable to adequately protect our intellectual property or to determine the extent of any unauthorized use, particularly in those foreign countries where the laws do not protect proprietary rights as fully as in the U.S. We also place significant value on our trade dress and the overall appearance and image of our products. However, we cannot assure that we can prevent imitation of our products by others or prevent others from seeking to block sales of GUESS? products for purported violations of their trademarks and proprietary rights. We also cannot assure that others will not assert rights in, or ownership of, trademarks and other proprietary rights of GUESS?, our proprietary rights would be upheld if challenged or we would, in that event, not be prevented from using our trademarks, any of which could have a material adverse effect on our financial condition and results of operations. Further, we could incur substantial costs in legal actions relating to our use of intellectual property or the use of our intellectual property by others.
Failure to appropriately address emerging environmental, social and governance matters could have a material adverse impact on our reputation and, as a result, our business.
There is an increased focus from investors, customers, associates, business partners and other stakeholders concerning environmental, social and governance matters.
The expectations related to environmental, social and governance matters are rapidly evolving, and we announce initiatives and goals related to environmental, social and governance matters from time to time. We could fail, or be perceived to fail, to act responsibly in our environmental, social and governance efforts, or we could fail in accurately reporting our progress on such initiatives and goals. In addition, we could be criticized for the scope of such initiatives or goals. As a result, we could suffer negative publicity and our reputation could be adversely impacted, which in turn could have a negative impact on investor perception and our products’ acceptance by consumers. This may also impact our ability to attract and retain talent to compete in the marketplace.
Risks Related to Third Party Relationships
Since we do not control our licensees’ actions and we depend on our licensees for a substantial portion of our earnings from operations, their conduct could harm our business.
We license to others the rights to produce and market certain products sold with our trademarks. While we retain significant control over our licensees’ products and advertising, we rely on our licensees for, among other things, operational and financial control over their businesses. If the quality, focus, image or distribution of our licensed products diminish, consumer acceptance of and demand for our brands and products could decline. This could materially and adversely affect our business and results of operations.
In fiscal 2022, approximately 75% of our net royalties were derived from our top five licensed product lines. A decrease in customer demand for any of these product lines could have a material adverse effect on our results of operations and financial condition. In addition, purchases from our top two licensees in fiscal 2022 accounted for almost 20% of our total inventory purchases. Although we believe we could replace existing licensees if necessary, we may have a negative impact during the transition period. Our inability to replace existing licensees could adversely affect our revenues and results of operations.
Our success depends on the strength of our relationships with our suppliers and manufacturers.
The majority of our finished goods are sourced from partners and suppliers located in over 30 countries outside the U.S. In fiscal 2022, over one third of these products were sourced from partners and suppliers based in China. Our two largest suppliers, which were licensee partners, accounted for approximately 20% of our purchases of finished goods in fiscal 2022.
We do not own or operate production facilities, and we depend on independent factories to supply fabric and manufacture products to our specifications. We do not have long-term contracts with any suppliers or manufacturers, and our business is dependent on our partnerships with our vendors. If manufacturing costs rise significantly, our product margins and results of operations could be negatively affected. In addition, few of our vendors manufacture our products exclusively. As a result, we compete with other companies for the production capacity of independent contractors. If our vendors fail to ship our fabrics or products on time or to meet our
quality standards or are unable to fill our orders, we might not be able to deliver products to our retail stores and wholesale customers on time or at all.
Moreover, our suppliers have at times been unable to deliver finished products in a timely fashion. This has led, from time-to-time, to an increase in our inventory, creating potential markdowns and a resulting decrease in our profitability. As there are a finite number of skilled manufacturers that meet our requirements, it could take significant time to identify and qualify suitable alternatives, which could result in our missing retailing seasons or our wholesale customers canceling orders, refusing to accept deliveries or requiring we lower selling prices. Since we prefer not to return merchandise to our manufacturers, we could also have a considerable amount of unsold merchandise. Any of these problems could harm our financial condition and results of operations.
Risks Related to Data Privacy and Cybersecurity
A data privacy breach or failure to comply with confidentiality and data privacy obligations could damage our reputation and customer relationships, expose us to litigation risk and potential fines and adversely affect our business.
As part of our normal operations, we collect, process, transmit and where appropriate, retain certain sensitive and confidential employee and customer information, including credit card information. There is significant concern by consumers and employees over the security of personal information, consumer identity theft and user privacy. Despite the security measures in place, our facilities and systems, and those of our third-party service providers, are vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. As a result of recent security breaches at a number of prominent retailers and other large institutions, the media and public scrutiny of information security and privacy has become more intense and the regulatory environment has become more stringent. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer or employee information, whether by us or our vendors, could result in significant legal and remediation expenses, severely damage our reputation and our customer relationships, harm sales, expose us to risks of litigation and liability and result in a material adverse effect on our business, financial condition and results of operations. Additionally, changing privacy laws in the United States, Europe and elsewhere, including the adoption by the European Union of the General Data Protection Regulation (“GDPR”), which became effective May 2018, created individual privacy rights and imposed increased obligations on companies handling personal data. Consequently, we may incur significant costs related to complying with laws regarding the protection and unauthorized disclosure of personal information. A failure to comply with the stringent rules of the GDPR or state privacy laws could result in material fines.
Our business could suffer if our computer systems and websites are disrupted or cease to operate effectively.
The efficient operation of our business is very dependent on our computer and information systems. We rely heavily on our merchandise management and ERP systems used to track sales and inventory and manage our supply chain. In addition, we have e-commerce and other Internet websites worldwide. Given the complexity of our business it is imperative that we maintain constant operation of our computer hardware and software systems. Despite our preventative efforts, our systems are vulnerable to damage or interruption from, among other things, ineffective upgrades, ineffective support from third-party vendors, difficulties in replacing or integrating new systems, security breaches, computer viruses, natural disasters and power outages. Any such problems or interruptions could result in incorrect information being supplied to management, inefficient ordering and replenishment of products, loss of orders, significant expenditures, disruption of our operations, inability to produce accurate financial statements, improper access to or disclosure of personally identifiable or proprietary information and other adverse impacts to our business. While we do experience damage or interruption to our systems, such events have not in the past had a material adverse impact on our business, financial condition or results of operations. It is possible, however, that future events resulting in damage or interruption to our systems could materially adversely impact our business, financial condition or results of operations.
Risks Related to Competition
The apparel industry is highly competitive, and we may face difficulties competing successfully in the future.
We operate in a highly competitive and fragmented industry with low barriers to entry. We compete with many apparel manufacturers and distributors, both domestically and internationally, as well as many well-known designers. We, along with our licensees, compete with many other designers and retailers (both brick and mortar and e-commerce sites), including department stores, some of whom are our major wholesale customers. Global and regional branded competitor companies pose significant challenges to our market share in our existing major domestic and foreign markets and to our ability to successfully develop new markets. Some of our competitors have advantages over us, including greater financial and marketing resources, higher wage rates, lower prices, more desirable store locations, greater online and e-commerce presence and faster speed-to-market. In addition, our larger competitors may be better equipped to adapt to changing conditions affecting the competitive market and newer competitors may be viewed as more desirable by consumers. Also, in most countries, the industry’s low barriers to entry allow the introduction of new products or new competitors at a fast pace. In other countries, high import duties may favor locally produced products. Any of these factors could result in reductions in sales or prices and could have a material adverse effect on our results of operations and financial condition.
Our Americas Wholesale business is highly concentrated. If any large customers decreases its purchases or experiences financial difficulties, our results of operations and financial condition could be adversely affected.
In fiscal 2022, our two largest wholesale customers accounted for a total of approximately 3.9% of our consolidated net revenue. Continued consolidation in the retail industry could further decrease the number of, or concentrate the ownership of, stores that carry our products and our licensees’ products. In recent years, there has been a significant increase in the number of designer brands seeking placement in department stores, which makes any one brand potentially less attractive to department stores. If any one of our major wholesale customers decides to decrease purchases from us, to stop carrying our products or to carry our products on less favorable terms, our sales and profitability could significantly decrease. Similarly, some retailers have recently experienced significant financial difficulties, which in some cases have resulted in bankruptcy, liquidation and store closures. Financial difficulties of one of our major customers could result in reduced business and higher credit risk with respect to that customer. Any of these circumstances could ultimately have a material adverse effect on our results of operations and financial condition.
Risks Related to Legal, Governmental and Regulatory Matters
Proxy contests or other activist investor actions threatened or commenced against us could cause the Company to incur substantial costs, divert management’s attention and resources, cause uncertainty about the strategic direction of our business and adversely affect our business, operating results and financial condition.
In connection with the 2022 annual meeting of our shareholders (the “2022 Annual Meeting”), Legion Partners Holdings, LLC, together with its affiliates (collectively, “Legion Partners”), is conducting a “vote no” campaign against the reelection of two of the directors expected to be recommended by our Board of Directors. Such actions, including, without limitation, the “vote no” campaign and related activities pursued by Legion Partners, or if other activist investors in the future pursue and maintain a proxy contest or related actions at an annual meeting of shareholders or otherwise take actions that conflict with our strategic direction, could have a material adverse effect on us for the following reasons:
•Activist investors may attempt to effect changes in how we are governed and our strategic direction, or to acquire control over the Company. In particular, activist investors may suggest changes to our operations, including management, that conflict with our strategic direction and could cause uncertainty amongst employees, customers and our investors about the strategic direction of our business.
•Responding to proxy contests or other actions, including Legion Partners’ “vote no” campaign, could disrupt our operations, be costly and time-consuming, and divert the attention of our Board of Directors, senior management and employees away from their regular duties and the pursuit of business strategies. In addition, we may choose to initiate, or may become subject to, litigation as a result of a proxy contest or matters arising from a proxy contest or other activist investor actions, which would serve as a further distraction to our Board of Directors, senior management and employees and could require us to incur significant additional costs.
•Perceived uncertainties as to our future direction as a result of potential changes to the composition of the Board of Directors may lead to the perception of a change in the direction of the business, instability or lack of continuity, which may be exploited by our competitors, may cause concern to our current or potential customers and employees, may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners.
•Proxy contests and related actions, including Legion Partners’ “vote no” campaign, could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
•Legion Partners’ “vote no” campaign may cause Company director candidates who fail to receive sufficient votes for election or reelection to tender resignations to the Board of Directors, which may, in its discretion, decide to accept such resignations.
Violation of laws or regulations, or changes to existing laws or regulations could adversely affect our business, reputation and results of operations.
We are subject to numerous laws and regulations at the state, federal and international levels, including, but not limited to, the areas of health care, data privacy, taxes, transportation and logistics, the environment, trade, conflict minerals, product safety, employment and labor, advertising and pricing practices, consumer protection, e-commerce, anti-competition, anti-corruption, including the federal Foreign Corrupt Practices Act, and intellectual property. Compliance with these numerous laws and regulations is complicated, time consuming and expensive. In addition, the laws may be inconsistent from jurisdiction to jurisdiction and are subject to change from time to time, sometimes unexpectedly. Failure to comply or to effectively anticipate changes in such laws or regulations could have a material adverse effect on our business, reputation and results of operations.
Violation of labor, environmental and other laws by our licensees or suppliers could harm our business.
We require our licensing partners and suppliers to operate in compliance with applicable laws and regulations. While our internal and vendor operating guidelines, code of conduct and monitoring programs promote ethical business practices and compliance with laws, we do not control our licensees or suppliers or their labor, environmental, safety or other business practices. A violation of law by any of our licensees or suppliers, or divergence of a licensee’s or supplier’s business practices or social responsibility standards from ours or those generally accepted as ethical in the U.S., could disrupt the shipment of our products, harm the value of our trademarks, damage our reputation or expose us to potential liability.
Additionally, in many jurisdictions in which we operate, governmental bodies are enacting new or additional legislation and regulations to reduce or mitigate the potential impacts of climate change. If we, our suppliers, or our contract manufacturers are required to comply with these laws and regulations, or if we choose to take voluntary steps to reduce or mitigate our impact on climate change, we may experience increased costs for energy, production, transportation, and raw materials, increased capital expenditures, or increased insurance premiums and deductibles, which could adversely impact our operations. Inconsistency of legislation and regulations among jurisdictions may also affect the costs of compliance with such laws and regulations. Any assessment of the potential impact of future climate change legislation, regulations or industry standards, as well as any international treaties and accords, is uncertain given the wide scope of potential regulatory change in the countries in which we operate.
We are subject to periodic litigation and other regulatory proceedings, which could result in unexpected obligations, as well as the diversion of time and resources.
We are involved from time-to-time in various U.S. and foreign lawsuits relating to our business, including purported class action lawsuits, employment claims and intellectual property claims. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such new or existing proceedings. Should management’s evaluation of any such claims or proceedings or the likelihood of any future claims or proceedings prove incorrect, our exposure could materially exceed expectations, adversely impacting our business, financial condition and results of operations. In addition, any significant litigation or regulatory matters, regardless of the merits, could divert management’s attention from our operations and result in substantial legal fees. Refer to “Part IV. Financial Statements – Note 15 – Commitments and Contingencies” in this Form 10-K for disclosures about our legal and other proceedings.
Risks Related to Inventory, Human Capital and Supply Chain Management
Our failure to retain our existing senior management team or to retain or attract other key personnel could adversely affect our business.
Our future performance depends to a significant degree upon the continued contributions of our key personnel, including our senior management and board members. Our business requires disciplined execution at all levels of our organization in order to ensure the timely delivery of desirable merchandise in appropriate quantities to our stores and other customers. This execution requires experienced and talented management in various areas of our business. Our success depends upon the personal efforts and abilities of our key personnel and senior management, particularly Carlos Alberini, Chief Executive Officer, and founding board member and Chief Creative Officer Paul Marciano. Although we believe we have a strong management team with relevant industry expertise, the extended loss of the services of these or other key personnel could materially harm our business. If Messrs. Alberini and Marciano were unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. As such, any disruption in the services of our key personnel could significantly disrupt our operations and prevent the timely achievement of our development strategies and growth, which could have an adverse effect on our financial condition, operating results and prospects. These changes could also increase the volatility of our stock price.
The market for qualified employees in the apparel and retail industries is highly competitive, and competitors may use aggressive tactics to recruit our key personnel. This competition has become exacerbated by the increase in employee resignations currently taking place throughout the U.S. as a result of the coronavirus pandemic, which is commonly referred to as the “Great Resignation.” Our success depends upon our ability to attract, retain and motivate qualified employees and upon the continued contributions of these individuals. We cannot provide assurances that we will be successful in attracting and retaining qualified employees in future periods without our key personnel. Competition for personnel is intense, and the loss of services of one or more of these individuals, or the negative public perception with respect to the loss of one or more of these individuals, could have an adverse effect on our business. The continued presence of Messrs. Alberini and Marciano is necessary to facilitate continuity in any succession planning, and without these individuals, we may not be successful in finding and integrating suitable successors.
Increases in labor costs, including wages, could adversely impact our operational results, financial condition and results of operations.
Our retail store and distribution and fulfillment center operations are subject to laws governing such matters as minimum wages, working conditions and overtime pay. As minimum wage rates increase or related laws and regulations change, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly or salaried employees. We have experienced and may continue to experience increased employee turnover as a result of the ongoing “Great Resignation,” which has led to wage rate increases in certain geographies. Any increase in the cost of our labor could have an adverse effect on our operating results, financial condition and results of operations. In addition, wage actions by other retailers may require us to increase wage rates in order to attract and retain talented employees. Persisting labor shortages, increased employee turnover or our inability to successfully implement our expanded format store strategy could also increase our labor costs. This in turn could lead us to increase prices, which could adversely impact our sales. We are also subject to risks related to other store and distribution and fulfillment center expenses and operational costs. Conversely, if competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline.
Our failure to shorten lead-times or to anticipate consumer demand, failure of our international vendors to supply quality products on a timely basis, failure of our merchandising strategies or failure to open new and remodel existing stores on schedule could result in excess inventory.
Although we have shortened lead-times for the design, production and development of a portion of our product lines, we expect to continue to place orders with our vendors for most of our products a season or more in advance. If we are unsuccessful in continuing to shorten lead-times or if we fail to anticipate fashion trends or consumer demand, we could have excess inventories. Additionally, our vendors could fail to timely supply the quality products and materials we require. Moreover, we could fail to effectively market or merchandise products once we receive them. We could fail to open new or remodeled stores on schedule, and inventory purchases made in anticipation of store openings could remain unsold. If we experience excess inventories including from
temporary store closures, wholesale order cancellations and reduced consumer demand from the COVID-19 pandemic, we could incur inventory write-downs and markdowns, which in turn could have a material adverse effect on our results of operations and financial condition.
Failure to deliver merchandise timely to our distribution facilities, stores or wholesale customers could disrupt our business.
The efficient operation of our global retail and wholesale businesses depends on the timely importation, customs clearance, and receipt of merchandise to and from distribution centers and our ability to efficiently process such merchandise. We receive merchandise at our distribution facilities and deliver merchandise to our stores and wholesale customers using independent third parties who import as well as transport goods. The independent third parties and entities on which they rely have employees which may be represented by labor unions. Disruptions in the delivery of merchandise caused by importation delays or work stoppages by employees or contractors of any of these third parties could delay the timely receipt of merchandise. Any failure by a third-party to respond adequately to our distribution needs could disrupt our business.
A disruption at our distribution facilities could have a material adverse impact on our sales and operating results.
Our U.S. business relies primarily on a single distribution center located in Louisville, Kentucky to receive, store and distribute merchandise to our U.S. retail stores, wholesale customers and e-commerce customers. Distribution of our products in Canada is handled primarily from two distribution centers in Montreal, Quebec. In Asia, we utilize several third-party operated distribution warehouses that service the Asia region. In Europe, distribution of our products is handled primarily by third-party distributors through a distribution facility in Venlo, Netherlands. We continue to optimize our logistic network in Europe.
Any significant interruption in the operation of any of our distribution centers due to natural events (including public health crises), weather conditions, accidents, system failures, capacity issues, labor issues, relationships with our third-party warehouse operators or landlords, failure to successfully complete or delays in optimizing our logistics network, new providers, and/or new distribution systems or other unforeseen causes could have a material adverse effect on our ability to efficiently manage the volume and/or costs associated with the distribution of our products without encountering shipment delays or wholesale order cancellations. Such events could negatively impact our sales, inventory positions, operating results and customer relations.
Risks Related to Credit, Indebtedness and Investment in our Stock
We may be unable to raise the funds necessary to repurchase our $300 million 2.0% convertible senior notes due 2024 (the “Notes”) for cash following a fundamental change, or to pay any cash amounts due upon conversion, and our other indebtedness may limit our ability to repurchase the Notes or pay cash upon their conversion.
Noteholders may require us to repurchase their Notes following a fundamental change at a cash repurchase price generally equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion, we will satisfy part or all of our conversion obligation in cash unless we elect to settle conversions solely in shares of our common stock. We will be required to repay the Notes in cash at their maturity, unless earlier converted or repurchased. We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the Notes or pay the cash amounts due upon conversion. In addition, applicable law, regulatory authorities and the agreements governing our other indebtedness, including our current Credit Facility and other agreements we may enter into in the future, may restrict our ability to make payments on the Notes other than scheduled principal and interest, and as a result, upon a fundamental change we may not be able to repurchase the Notes and upon any conversions of the Notes may be unable to pay the cash amounts, if any, then due. Our inability to satisfy our obligations under the Notes could harm our reputation and affect the trading price of our common stock.
Our failure to repurchase Notes or to pay the cash amounts due upon conversion or at maturity when required will constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the other indebtedness and the Notes.
The issuance or sale of shares of our common stock, or rights to acquire shares of our common stock, could depress the trading price of our common stock and the Notes.
We may conduct future offerings of our common stock, preferred stock or other securities that are convertible into or exercisable for our common stock to finance operations, fund acquisitions, or other purposes. In addition, we have reserved a substantial number of shares of our common stock for issuance upon the exercise of stock options, upon the vesting of restricted stock and restricted stock units pursuant to our employee benefit plans, upon conversion of the Notes and upon the exercise and settlement or termination of the warrant transactions. We have also recently increased our quarterly cash dividend which will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to decrease) of the Notes in accordance with the terms of the indenture. Refer to “— We cannot ensure that we will continue paying dividends at the current rates, or at all.” We cannot predict the size of future issuances or the effect they may have on the trading price of our common stock and the Notes.
If we issue additional shares of our common stock or rights to acquire shares of our common stock, if any of our existing stockholders sells a substantial amount of our common stock, or if the market perceives that such issuances or sales may occur, then the trading price of our common stock and the Notes may significantly decrease. In addition, our issuance of additional shares of common stock will dilute the ownership interests of our existing common stockholders.
Difficulties in the credit markets could have a negative impact on our customers, suppliers and business partners, which, in turn could materially and adversely affect our results of operations and liquidity.
The impact of difficult credit conditions on our customers, business partners, suppliers, insurance providers and financial institutions with which we do business cannot be predicted and may be quite severe. The inability of our manufacturers to ship our products could impair our ability to meet delivery date requirements. A disruption in the ability of our significant customers, distributors or licensees to access liquidity could cause serious disruptions or an overall deterioration of their businesses. A disruption in the ability of a large group of our smaller customers to access liquidity could have similar adverse effects, particularly in our important multi-brand wholesale channel in Southern Europe, where many customers tend to be relatively small and not well capitalized. These conditions could lead to significant reductions in future orders of our products and the inability or failure on our customers’ part to meet their payment obligations to us, any of which could have a material adverse effect on our results of operations and liquidity.
Similarly, a failure on the part of our insurance providers to meet their obligations for claims made by us could have a material adverse effect on our results of operations and liquidity. Continued market difficulties or additional deterioration could jeopardize our ability to rely on those financial institutions that are parties to our various bank facilities and foreign exchange contracts. We could be exposed to a loss if the counterparty fails to meet its obligations upon our exercise of foreign exchange contracts. In addition, instability or other distress in the financial markets could impair the ability of one or more of the banks participating in our credit agreements from honoring its commitments. This could have an adverse effect on our business if we were not able to replace those commitments or to locate other sources of liquidity on acceptable terms.
Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations under our outstanding indebtedness.
As of January 29, 2022, we had approximately $17.9 million of secured indebtedness, $363.5 million of senior unsecured indebtedness at maturity and approximately $325.8 million of trade payables on a consolidated basis.
We may incur additional indebtedness or draw on our existing credit facilities to meet future financing needs, some of which may be secured indebtedness.
Our indebtedness could have significant negative consequences for our security holders and our business, results of operations and financial condition by, among other things: (i) increasing our vulnerability to adverse economic and industry conditions; (ii) limiting our ability to obtain additional financing; (iii) requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, which will reduce the amount of cash available for other purposes; (iv) limiting our flexibility to plan for, or react to, changes in our business; (v) diluting the interests of our existing stockholders as a result of issuing shares of our common stock upon conversion of the Notes; and (vi) placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital.
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under our indebtedness, and our cash needs may increase in the future. In addition, our existing Credit Facility contains, and any future indebtedness may contain, financial and other restrictive covenants that limit our ability to operate our business, raise capital or make payments under our other indebtedness. If we fail to comply with these covenants or to make payments under our indebtedness when due, then we would be in default under that indebtedness, which could, in turn, result in that and our other indebtedness becoming immediately payable in full.
We conduct a significant amount of our operations through our subsidiaries and may rely on our subsidiaries to make payments under our outstanding indebtedness.
Our ability to pay amounts due on our outstanding indebtedness may depend on the cash flows of our subsidiaries and their ability to make distributions to us. Our subsidiaries are separate and distinct legal entities and any payments to us would depend on the earnings or financial condition of our subsidiaries and various business considerations. Statutory, contractual or other restrictions may also limit our subsidiaries’ ability to pay dividends or make distributions, loans or advances to us, and the notes and the Indenture (as defined below) pursuant to which the notes were issued do not limit or restrict our or our subsidiaries’ ability to enter into contractual restrictions on our subsidiaries’ ability to pay dividends or make distributions, loans or advances to us. For these reasons, we may not have access to any assets or cash flows of our subsidiaries to make payments on our outstanding indebtedness.
Recent and future regulatory actions and other events may adversely affect the trading price and liquidity of the Notes and the liquidity of the market for our common stock.
Noteholders may seek to employ a convertible note arbitrage strategy with respect to the Notes. Under this strategy, investors typically short sell a certain number of shares of our common stock and adjust their short position over time while they continue to hold the Notes. Investors may also implement this type of strategy by entering into swaps on our common stock in lieu of, or in addition to, short selling shares of our common stock.
The SEC and other regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including our common stock). These rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc., and the national securities exchanges of a “limit up-limit down” program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any governmental or regulatory action that restricts investors’ ability to effect short sales of our common stock or enter into equity swaps on our common stock could depress the trading price of, and the liquidity of the market for, the Notes.
In addition, the liquidity of the market for our common stock may decline, including as a result of our anticipated share repurchases, which could reduce the number of shares available for lending in connection with short sale transactions and the number of counterparties willing to enter into an equity swap on our common stock with a note investor. If investors and noteholders seeking to employ a convertible note arbitrage strategy are unable to borrow or enter into equity swaps on our common stock on commercially reasonable terms, then the trading price of, and the liquidity of the market for, the Notes may significantly decline.
Provisions in the indenture for the Notes (the “Indenture”) could delay or prevent an otherwise beneficial takeover of us.
Certain provisions in the Indenture could make a third-party attempt to acquire us more difficult or expensive. If a takeover constitutes a fundamental change, then noteholders will have the right to require us to repurchase their Notes for cash. In addition, if a takeover constitutes a make-whole fundamental change, then we may be required to temporarily increase the conversion rate. As well, the Indenture prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. In such cases, and in other cases, our obligations under the Notes and the Indenture could increase the cost of acquiring us or otherwise discourage a third-party from acquiring us or removing incumbent management, including in a transaction that noteholders or holders of our common stock may view as favorable.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and results of operations.
In the event the conditional conversion feature of the Notes is triggered, noteholders will be entitled to convert the Notes at any time during specified periods at their option. If one or more noteholders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to settle all or a portion of the conversion obligation through the payment of cash, which could adversely affect our liquidity. Even if noteholders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current liability, which would result in a material reduction of our net working capital.
The accounting method for the Notes could adversely affect our reported financial condition and results.
The accounting method for reflecting the Notes on our balance sheet, accruing interest expense for the Notes and reflecting the underlying shares of our common stock in our reported diluted earnings per share may adversely affect our reported earnings and financial condition.
Under applicable accounting principles, the initial liability carrying amount of the Notes is the fair value of a similar debt instrument that does not have a conversion feature, valued using our cost of capital for straight, unconvertible debt. We reflect the difference between the net proceeds from the Notes offering and the initial carrying amount as a debt discount for accounting purposes, which will be amortized into interest expense over the term of the Notes. As a result of this amortization, the interest expense that we expect to recognize for the Notes for accounting purposes will be greater than the cash interest payments we will pay on the Notes, which will result in lower reported income or higher reported loss. The lower reported income or higher reported loss resulting from this accounting treatment could depress the trading price of our common stock and the Notes.
In August 2020, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance requiring, among other things, that the “if-converted” method be applied for all convertible instruments (the treasury stock method is no longer available) and removes the ability to rebut the presumption of share settlement for contracts that may be settled in cash or stock. We adopted this guidance on January 30, 2022 using the modified retrospective transition method, which allows for a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and does not require retrospective adjustments to prior periods. Under this new accounting guidance, diluted earnings per share will generally be calculated assuming all the Notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be antidilutive. Accordingly, segmentamong other impacts, we expect application of the if-converted method will result in an increase of approximately 11.6 million shares in our diluted weighted-average shares of common stock outstanding for the purposes of calculating diluted earnings per share, which will reduce our reported diluted earnings per share in the future.
Furthermore, if any of the conditions to the convertibility of the Notes is satisfied, then we may be required under applicable accounting standards to reclassify the liability carrying value of the Notes as a current, rather than a long-term, liability. This reclassification could be required even if no noteholders convert their Notes and could materially reduce our reported working capital.
The Notes’ hedge and warrant transactions may affect the value of the Notes and our common stock.
In connection with the pricing of the Notes, we entered into convertible note hedge transactions with the hedge counterparties. The convertible note hedge transactions covered, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of shares of common stock that initially underlie
the Notes, including those sold to the initial purchaser, and are expected generally to reduce the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be. We also entered into warrant transactions with the hedge counterparties relating to the same number of shares of our common stock, subject to customary antidilution adjustments. However, the warrant transactions could separately have a dilutive effect on our common stock to the extent that the market price per share of our common stock exceeds the strike price of the warrants. In connection with establishing their initial hedges of the convertible note hedge and warrant transactions, the hedge counterparties or affiliates thereof entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the Notes, and may unwind these derivative transactions and purchase shares of our common stock in open market transactions shortly following the pricing of the Notes. These activities could increase (or reduce the size of any decrease in) the market price of our common stock or the Notes at that time.
In addition, the hedge counterparties or affiliates thereof may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so during any observation period related to a conversion of Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Notes.
We are subject to counterparty risk with respect to the Notes’ hedge transactions.
The hedge counterparties are financial institutions, and we are subject to the risk that they might default under the convertible note hedge transactions. Our exposure to the credit risk of the hedge counterparties is not secured by any collateral. Global economic conditions have from time to time resulted in the actual or perceived failure or financial difficulties of many financial institutions. If any hedge counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with such hedge counterparty. Our exposure will depend on many factors, but, generally, the increase in our exposure will be correlated to the increase in the market price and in the volatility of our common stock. In addition, upon a default by a hedge counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the hedge counterparties.
Conversion of the Notes or exercise of the warrants evidenced by the warrant transactions may dilute the ownership interest of existing stockholders.
At our election, we may settle Notes tendered for conversion entirely or partly in shares of our common stock. Furthermore, the warrants evidenced by the warrant transactions are expected to be settled on a net-share basis. As a result, the conversion of some or all of the Notes or the exercise of some or all of such warrants may dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion of the Notes or such exercise of the warrants could adversely affect prevailing market prices of our common stock and, in turn, the price of the Notes. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could depress the price of our common stock.
Our repurchases of shares of our common stock may affect the value of the Notes and our common stock.
After effectuating the convertible note hedge transactions, we used substantially all of the net proceeds of the Notes offering to repurchase shares of our common stock pursuant to our 2012 $500 million share repurchase program. Some of these transactions were effected by repurchases from purchasers of the Notes in privately negotiated transactions through the initial purchaser or its affiliate, as our agent, concurrently with the closing of the Notes offering. During fiscal 2022, our Board of Directors terminated this previous share repurchase program and authorized a new $200 million share repurchase program (the “2021 Share Repurchase Program”). Accordingly, we may continue to effect repurchases in open market or other transactions from time to time in the future. On March 14, 2022, the Board of Directors expanded the 2021 Share Repurchase Program authorization by $100 million. In connection with this expanded authorization, on March 18, 2022, we entered into an accelerated share repurchase (“2022 ASR Contract”) arrangement to repurchase an aggregate of $175 million of our common stock.
Repurchases of shares of our common stock may cause or avoid an increase or a decrease in the market price of our common stock or the Notes and add volatility. There can be no assurance that repurchases will be
made at the best possible price. Potential risks and uncertainties also include, but are not necessarily limited to, the amount and timing of future share repurchases and the origin of funds used for such repurchases. The existence of a share repurchase program could also cause the market price of our common stock to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our common stock. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time. Any such suspension could cause the market price of our common stock to decline.
Fluctuations in quarterly performance including comparable store sales, sales per square foot, operating margins, timing of wholesale orders, royalty net revenue or other factors could have a material adverse effect on our earnings and our stock price.
Our quarterly results of operations for each of our business segments have fluctuated in the past and can be expected to fluctuate in the future. Further, if global growth plans or productivity initiatives fail to meet our expected results, our overhead and other costs could increase without an offsetting increase in sales and net revenue. This could have a material adverse effect on our results of operations and financial condition, including but not limited to future impairments of store assets or goodwill.
Our net revenue and operating results have historically been adjusted forlower in the first half of our fiscal 2017year due to general seasonal trends in the apparel and retail industries. Our comparable store sales, quarterly results of operations and stock price can also be affected by a variety of other factors, including, but not limited to: (i) shifts in consumer tastes and fashion trends; (ii) the timing of new store openings and the relative proportion of new stores to mature stores; (iii) the timing and effectiveness of planned store closures; (iv) calendar shifts of holiday or seasonal periods; (v) the timing of seasonal wholesale shipments; (vi) the effectiveness of our inventory management; (vii) the effectiveness and efficiency of our product distribution network; (viii) changes in our merchandise mix; (ix) changes in our mix of revenues by segment; (x) the timing of promotional events; (xi) actions by competitors; (xii) weather conditions; (xiii) public health crises; (xiv) changes in the business environment; (xv) inflationary changes in prices and costs; (xvi) changes in the payment of future cash dividends; (xvii) changes in currency exchange rates; (xviii) population trends; (xix) changes in patterns of commerce such as the expansion of e-commerce; (xx) the level of pre-operating expenses associated with new stores; and (xxi) volatility in securities’ markets which could impact the value of our investments in non-operating assets.
An unfavorable change in any of the above factors, among others could have a material adverse effect on our results of operations and our stock price.
We cannot ensure we will continue paying dividends at the current rates or at all.
We cannot ensure we will continue periodic dividends on our common stock at the current rates, or at all. On November 23, 2021, we announced an increase to our regular quarterly cash dividend from $0.1125 to $0.225 per share on our common stock. During the first and second quarters of fiscal 2016 to conform2021, we announced that our Board of Directors had deferred the decision with respect to the payment of our quarterly cash dividend, in light of the uncertainties related to the COVID-19 pandemic. We resumed paying our quarterly cash dividend of $0.1125 per share beginning in the third quarter of fiscal 2021, but decided to not declare any cash dividends for the first and second quarters of fiscal 2021.
Changes in our dividend and market perceptions and expectations with respect to our dividend, may materially affect the price of our common stock and the Notes (as defined below). In addition, pursuant to the terms of the indenture governing the Notes, our increase to the quarterly cash dividend in fiscal 2022 requires adjustments to the conversion rate (resulting in an increase in the conversion rate) and the conversion price (resulting in a decrease in the conversion price) in connection with the payment of the quarterly dividend. Refer to “Part IV. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions” in this Form 10-K for disclosures about the Notes.
Any quarterly dividends on our common stock will be paid from funds legally available for such purpose when, as and if declared by our Board of Directors. Holders of our equity securities have no contractual or other legal right to receive dividends. Decisions on whether, when and in which amounts to continue making any future dividend distributions are entirely at the discretion of our Board of Directors, which reserves the right, in its sole discretion, to change or terminate our dividend practices at any time and for any reason without prior notice, including without limitation for any of the following reasons: (i) our cash requirements or plans might change for a wide variety of reasons, including changes in our financial position, capital allocation plans (including a desire to retain or accumulate cash), capital spending plans, stock purchase plans, acquisition strategies, strategic
initiatives, debt payment plans (including a desire to maintain or improve credit ratings on our debt securities), pension funding or other benefits payments; (ii) our ability to service and refinance our current period presentation. Management evaluatesand future indebtedness and our ability to borrow or raise additional capital to satisfy our capital needs; (iii) the amount of dividends that we may distribute to our shareholders is subject to restrictions under applicable law and restrictions imposed by our existing or future credit facilities, debt securities, then-outstanding preferred stock securities, if any, leases and other agreements, including restricted payment and leverage covenants; and (iv) the amount of cash that our subsidiaries may make available to us, whether by dividends, loans or other payments, may be subject to the legal, regulatory and contractual restrictions in our outstanding indebtedness.
Our Two Founding Board Members own a significant percentage of our common stock. Their respective interests may differ from the interests of our other stockholders.
Maurice Marciano, Board member, and Paul Marciano, Chief Creative Officer and Board member, collectively, beneficially own approximately 42% of our outstanding shares of common stock as of March 21, 2022. The sale or prospect of the sale of a substantial number of these shares could have an adverse impact on the market price of our common stock. Moreover, these individuals may have different interests than our other stockholders or among themselves and, accordingly, they may seek to direct the operations of our business in a manner contrary to the interests of our other stockholders. As long as these individuals own a significant percentage of our common stock, if aligned, they may effectively be able to: (i) elect our directors; (ii) amend or prevent amendment of our Restated Certificate of Incorporation or Bylaws; (iii) effect or prevent a merger, sale and/or purchase of assets or other corporate transactions; and (iv) control the outcome of any other matter submitted to our stockholders for vote.
Their stock ownership, together with the anti-takeover effects of certain provisions of applicable Delaware law and our Restated Certificate of Incorporation and Bylaws, may discourage acquisition bids or allow the Marciano’s to delay or prevent a change in control that may be favored by our other stockholders, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our common stock price.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2. Properties.
As of January 29, 2022, all of our principal facilities were leased with the exception of our U.S. distribution center based in Louisville, Kentucky and our administrative office based in Florence, Italy. Certain information concerning our principal facilities is set forth below:
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Location | | Use | | Approximate Area in Square Feet |
| | | | |
Lugano (Bioggio)/Stabio, Switzerland | | Principal executive and administrative offices, global design, sourcing, marketing and licensing facilities, sales offices and showrooms used by our Europe segment and Corporate support group | | 190,800 | |
Los Angeles, California | | Executive and administrative offices, supporting design, sourcing and licensing facilities, sales offices and warehouse facilities used by our Americas Wholesale, Americas Retail, and Corporate support group | | 341,700 | |
Piacenza, Italy | | Distribution and warehousing facilities used by our Europe segment | | 592,000 | |
Venlo, Netherlands | | Distribution and warehousing facilities used by our Europe segment | | 506,700 | |
Louisville, Kentucky | | Distribution and warehousing facility used by our Americas Wholesale and Americas Retail segments | | 506,000 | |
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Jasin/Katowice, Poland | | Distribution and warehousing facilities and administrative offices used by our Europe segment | | 235,400 | |
Montreal/Toronto/Vancouver, Canada | | Administrative offices, showrooms and warehouse facilities used by our Americas Wholesale and Americas Retail segments | | 203,100 | |
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Florence, Italy | | Administrative office used by our Europe segment | | 113,000 | |
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Seoul, South Korea | | Administrative and sales offices, design facilities and showrooms used by our Asia segment | | 41,200 | |
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Shanghai, China | | Administrative offices used by our Asia segment | | 17,800 | |
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Our North American corporate, wholesale and retail headquarters and certain warehouse facilities are located in Los Angeles, California, consisting of four buildings totaling approximately 341,700 square feet (the “North American Corporate Headquarters”) and a parking lot adjacent to the North American Corporate Headquarters. These facilities are leased by us from limited partnerships in which the sole partners are trusts controlled by and for the benefit of Maurice Marciano and Paul Marciano (the “Principal Stockholders”) and their families pursuant to a lease that expires September 30, 2025, with an additional five-year renewal option to September 30, 2030 at our sole discretion. The related lease liability was approximately $48.4 million as of January 29, 2022.
In addition, through a wholly-owned Canadian subsidiary, we lease warehouse and administrative facilities in Montreal, Quebec from a partnership affiliated with the Principal Stockholders. During the second quarter of fiscal 2022, we entered into a lease amendment to extend the lease term through August 2023. The base rent is approximately CAD$0.6 million (US$0.5 million) per year with all other terms of the existing lease remaining in full force and effect. The related lease liability was approximately CAD$0.9 million (US$0.7 million) as of January 29, 2022.
Through a French subsidiary, we lease a showroom and office space located in Paris, France from an entity that is owned in part by an affiliate of the Principal Stockholders. During the first quarter of fiscal 2022, we entered into a nine-year lease extension which includes an option for early termination at the end of the third and sixth years. The lease has standard terms with a quarterly base charge plus a variable charge aggregating approximately €0.9 million (US$1.0 million) per year (with subsequent annual rent adjustments based on a specific price index). All other material terms in the previously existing Paris lease remain the same. The related lease liability was approximately €5.8 million (US$6.4 million) as of January 29, 2022.
Refer to “Part IV. Financial Statements – Note 14 – Related Party Transactions” in this Form 10-K for disclosures about our related party transactions.
Our U.S. distribution center is a fully automated facility based in Louisville, Kentucky. Distribution of our products in Canada is handled primarily from two leased facilities based in Montreal, Quebec. Distribution of our products in Europe is handled by third-party distributors. Additionally, we utilize several third-party operated distribution warehouses that service the Asia region.
We lease our showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under non-cancelable operating lease agreements expiring on various dates through January 2039. These facilities had aggregate real estate lease liabilities as of January 29, 2022 totaling approximately $699.7 million, excluding related party liabilities. See “Part IV. Financial Statements – Note 9 – Lease Accounting” in this Form 10-K for further detail.
We believe our existing facilities are well maintained, in good operating condition and are adequate to support our present level of operations.
ITEM 3. Legal Proceedings.
Refer to “Part IV. Financial Statements – Note 15 – Commitments and Contingencies” in this Form 10-K for disclosures about our legal and other proceedings.
ITEM 4. Mine Safety Disclosures.
Not applicable.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market and Shareholder Information
Since August 8, 1996, our common stock has been listed on the New York Stock Exchange under the symbol ‘GES.’ On March 21, 2022, there were 262 holders of record of our common stock.
Prior to the initiation of a quarterly dividend on February 12, 2007, we had not declared any dividends on our common stock since our initial public offering in 1996. During the first and second quarters of fiscal 2021, we announced that our Board of Directors had deferred the decision with respect to the payment of our quarterly cash dividend in light of the uncertainties related to the COVID-19 pandemic. We resumed paying our quarterly cash dividend of $0.1125 per share beginning in the third quarter of fiscal 2021, but decided to not declare any cash dividends for the first and second quarters of fiscal 2021. On November 23, 2021, we announced an increase to our regular quarterly cash dividend from $0.1125 to $0.225 per share on our common stock.
Decisions on whether, when and in what amounts to continue making any future dividend distributions will remain at all times entirely at the discretion of our Board of Directors, which reserves the right to change or terminate our dividend practices at any time and for any reason without prior notice. The payment of cash dividends in the future will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions and U.S. and global liquidity.
Share Repurchase Program
Our share repurchases during each fiscal month of the fourth quarter of fiscal 2022 were as follows:
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Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs |
October 31, 2021 to November 27, 2021 | | | | | | | |
Repurchase program1 | — | | | — | | | — | | | $ | 200,000,000 | |
Employee transactions2 | — | | | — | | | — | | | |
November 28, 2021 to January 1, 2022 | | | | | | | |
Repurchase program1 | 1,925,683 | | | $ | 22.19 | | | 1,925,683 | | | $ | 157,265,474 | |
Employee transactions2 | 6,359 | | | $ | 23.64 | | | — | | | |
January 2, 2022 to January 29, 2022 | | | | | | | |
Repurchase program1 | 363,609 | | | $ | 22.72 | | | 363,609 | | | $ | 149,004,273 | |
Employee transactions2 | 89,446 | | | $ | 22.98 | | | — | | | |
Total | | | | | | | |
Repurchase program1 | 2,289,292 | | | $ | 22.28 | | | 2,289,292 | | | |
Employee transactions2 | 95,805 | | | $ | 23.02 | | | — | | | |
1On August 23, 2021, our Board of Directors terminated the previously authorized 2012 share repurchase program (which had $47.8 million capacity remaining) and authorized a new program (the “2021 Share Repurchase Program”) to repurchase, from time-to-time and as market and business conditions warrant, up to $200 million of our common stock. On March 14, 2022, the Board of Directors expanded its repurchase authorization by $100 million, leaving a new capacity of $249.0 million. Repurchases may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under the program and the program may be discontinued at any time, without prior notice.
2Consists of shares surrendered to, or withheld by, us in satisfaction of employee tax withholding obligations that occur upon vesting of restricted stock awards granted under our 2004 Equity Incentive Plan, as amended.
Performance Graph
The Stock Price Performance Graph below compares our cumulative stockholder return with that of the S&P 500 Index (a broad equity market index) and the S&P 1500 Apparel Retail Index (a published industry index) over the five fiscal years beginning January 28, 2017. The return on investment is calculated based on an investment of $100 on January 28, 2017, with dividends, if any, reinvested. Past performance is not necessarily indicative of future performance.
COMPARISON OF FIVE YEAR TOTAL RETURN
AMONG GUESS?, INC.,
S&P 500 INDEX AND S&P 1500 APPAREL RETAIL INDEX
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| | Period Ended |
Company/Market/Peer Group | | 1/28/2017 | | 2/3/2018 | | 2/2/2019 | | 2/1/2020 | | 1/30/2021 | | 1/29/2022 |
Guess?, Inc. | | $ | 100.00 | | | $ | 127.20 | | | $ | 172.51 | | | $ | 199.12 | | | $ | 220.24 | | | $ | 207.53 | |
S&P 1500 Apparel Retail Index | | 100.00 | | | 106.26 | | | 118.24 | | | 131.27 | | | 144.95 | | | 161.43 | |
S&P 500 Index | | 100.00 | | | 122.83 | | | 122.76 | | | 149.23 | | | 174.97 | | | 211.72 | |
ITEM 6. Reserved.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
Unless the context indicates otherwise, when we refer to “we,” “us,” “our” or the “Company” in this Form 10‑K, we are referring to Guess?, Inc. and its subsidiaries on a consolidated basis.
COVID-19 Business Update
The COVID-19 pandemic is continuing to negatively impact our businesses. In late fiscal 2021, we incurred a new round of government-mandated temporary store closures, mostly in Europe. The number of temporary store closures ebbed and flowed during the first quarter of fiscal 2022 based on local conditions. During the second quarter of fiscal 2022, we gradually opened our stores that were closed at the end of the first quarter of fiscal 2022 due to COVID-19 restrictions. As of January 29, 2022, 100% of our stores were open. As of March 21, 2022, approximately 99% of our directly operated stores were open.
The COVID-19 crisis has also contributed to disruptions in the overall global supply chain, leading to industry-wide product delays and higher product and freight costs. We have been working actively to mitigate these headwinds to the extent possible through a number of global supply chain initiatives.
In light of the fluid nature of the pandemic, we continue to carefully monitor global and regional developments, such as the recent spread of the Omicron variant, and respond appropriately. We also continue to strategically manage expenses in order to protect profitability and to mitigate, to the extent possible, the effect of the supply chain disruptions.
Business Segments
Our businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail, Americas Wholesale, Europe, Asia and Licensing. Our Americas Retail, Americas Wholesale, Europe and Licensing reportable segments are the same as their respective operating segments. Certain components of our Asia operating segment are separate operating segments based on region, which have been aggregated into the Asia reportable segment for disclosure purposes. We evaluate segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, asset impairment charges, net gains (losses) from lease terminations, asset impairmentmodifications, restructuring charges and restructuring charges,certain non-recurring credits (charges), if any. The Americas Retail segment includes the Company’sour retail and e-commerce operations in North and Central America and its retail operations in South America.the Americas. The Americas Wholesale segment includes the Company’sour wholesale operations in the Americas. The Europe segment includes the Company’sour retail, e-commerce and wholesale operations in Europe and the Middle East. The Asia segment includes the Company’sour retail, e-commerce and wholesale operations in Asia and the Pacific. The Licensing segment includes the worldwide licensing operations of the Company.operations. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, asset impairment charges, net gains (losses) on lease terminations, asset impairmentmodifications, restructuring charges and restructuring charges.certain non-recurring credits (charges), if any. Corporate overhead costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, corporate performance-based compensation, facilities, global advertising and marketing, human resources, information technology and legal. Information regarding these segments is summarized in “Part IV. Financial Statements – Note 17 to the Consolidated Financial Statements.
18 – Segment Information” in this Form 10-K.
Products
We derive our net revenue from the sale of GUESS?, G by GUESS (GbG), GUESS Kids and MARCIANO apparel and our licensees’ products through our worldwide network of directly operateddirectly-operated and licensed retail stores, wholesale customers and distributors, as well as our online sites. We also derive royalty revenue from worldwide licensing activities. During fiscal 2021, we made the decision to integrate our G by GUESS brand into our Factory business over time in order to drive further efficiencies.
Foreign Currency Volatility
Since the majority of our international operations are conducted in currencies other than the U.S. dollar (primarily the euro,British pound, Canadian dollar, Chinese yuan, euro, Japanese yen, Korean won, Chinese yuan, Mexican peso, Polish zloty, Russian rouble and Russian rouble)Turkish lira), currency fluctuations can have a significant impact on the translation of our international revenues and earnings (loss) into U.S. dollar amounts.dollars.
In addition, someSome of our transactions that occur primarily in Europe, Canada, South Korea, China, Hong Kong and Mexico are denominated in U.S. dollars, Swiss francs, British pounds and Russian roubles, exposing them to exchange rate fluctuations when these transactions (such as inventory purchases)purchases or periodic lease payments) are converted to their functional currencies. As a result, fluctuations in exchange rates can impact the operating margins of our foreign operations and reported earnings (loss), and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates. When these foreign exchange rates weaken versus the U.S. dollar at the time the respective U.S. dollar denominated inventorypayment is purchasedmade relative to the purchases ofpayments made in the comparable period, our product margins could be unfavorably impacted ifimpacted.
In addition, there are certain real estate leases which are denominated in a currency other than the relative sales prices do not change.functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). As a result, we may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end.
During fiscal 2018,2022, the average U.S. dollar rate was stronger against the Turkish lira, Russian rouble, and Japanese yen and weaker against the British pound, Canadian dollar, the euro, theChinese yuan, Mexican peso, Polish zloty and Korean won the Mexican peso and the Russian rouble and stronger against the Chinese yuan compared to the average rate in fiscal 2017.2021. This had an overall favorableunfavorable impact on the translation of our international revenues and earnings from operations during fiscal 20182022 compared to the prior year.
If the U.S. dollar strengthens relative to the respective fiscal 20182022 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results, as well as our international cash and other balance sheet items during fiscal 2019,2023, particularly in Canada, Europe (primarily the euro, British pound, Turkish lira and Russian rouble) and Mexico. Alternatively, if the U.S. dollar weakens relative to the respective fiscal 20182022 foreign exchange rates, our revenues and operating results, as well as our other cash balance sheet items, could be positively impacted by foreign currency fluctuations during fiscal 2019,2023, particularly in these regions.
We currently operate in Russia through our wholesale, retail and e-commerce channels and have 70% ownership of a joint venture. We do not have contracts or other relationships with Russian banks, and Russian sales in our wholesale channel are primarily conducted either in cash in advance, with a bank guarantee or with insurance coverage. Slightly less than 3% of our revenues for fiscal 2022 were generated from sales in these regions. The Company entersimposition of enhanced export controls and economic sanctions on transactions with Russia and Russian entities could prevent us from performing existing contracts. For further discussion on currency-related risk, refer to our risk factors under “Part I, Item 1A. Risk Factors.”
We enter into derivative financial instrumentsto offset some but not all of the exchange risk on foreign currency transactions. For additional discussion regarding our exposure to foreign currency risk, forward contracts designated as hedging instruments and forward contracts not designated as hedging instruments, refer to “Item“Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Strategy
The Company continuesIn December 2019 and updated in March 2021, Carlos Alberini, our Chief Executive Officer, shared his strategic vision and implementation plan for execution which included the identification of several key priorities to remain focused on its five top strategic initiatives aimed at driving shareholder value, including:drive revenue and operating profit growth. These priorities are: (i) elevatingbrand relevancy and brand elevation; (ii) product excellence; (iii) customer centricity; (iv) global footprint; and (v) functional capabilities; each as further described below:
Brand Relevancy and Brand Elevation. We plan to optimize our brand architecture to be relevant with our three target consumer groups: Heritage, Millennials, and Generation Z. We also plan to elevate our brand and improve the quality of our products, allowing us to realize more full-priced sales organization and merchandising strategyrely less on promotional activity. We will continue to matchuse unique go-to-market strategies and execute celebrity and influencer partnerships and collaborations as we believe that they are critical to engage more effectively with a younger and broader audience.
Product Excellence. We believe product is a key factor of success in our business. We strive to design and make great products and will extend our product offering to provide our customers with products for the qualitydifferent occasions of their lifestyles. We will seek to better address local product needs.
Customer Centricity. We intend to place the customer at the center of everything we do. We plan to implement processes and platforms to provide our customers with a seamless omni-channel experience and expand our digital business.
Global Footprint. We will continue to expand the reach of our productbrands by optimizing the productivity and marketing; (ii) building a major business in Asia by unlocking the potential of the GUESS? brand in the region; (iii) creating a culture of purpose and accountability throughout the entire Company by implementing a more centralized organizational structure that reinforces our focus on sales and profitability; (iv) improving our cost structure (including supply chain and overhead); and (v) stabilizing and revitalizing our wholesale business. The following provides further details on the progress of these initiatives:
Sales Organization and Merchandising Strategy. We are executing on our plan to elevate the qualityprofitability of our sales organizationcurrent footprint and merchandising strategy which includes: (1) elevating the product knowledge ofexpanding our sales force; (2) building a more strategic and operational online organization in order to increase millennials’ engagement with our brand through digital marketing and social media; (3) taking steps such as investing in key stores and developing stronger replenishment, visual, stockroom and cost-control standards in order to improve our overall field and store structure; (4) implementing a more effective yearly retail calendar to better enable each store to fully capture local opportunities; (5) using feedback from our sales force to improve our collections and increase the number and effectiveness of our SKU’s; and (6) implementing a global pricing system with greater clarity and simplicity.
distribution channels.
BuildingFunctional Capabilities. We expect to drive operational improvements to leverage and support our Asia Business. We believe there continues to be significant potential in this region, particularly in mainland China, and plan to continue to allocate sufficient resources to fuel future growth.
Transforming our Company’s Culture. In order to generate global synergies, major decisions (including supply chain, technology, finance, stock allocation and communications) are becomingbusiness more centralizedeffectively, primarily in the Company’sareas of logistics, sourcing, product development and production, inventory management, team in Los Angeles. This centralized approach reinforces our focus on sales and profitability and fosters an environment of accountability and execution measured through key performance metrics.overall infrastructure.
Improving our Cost Structure. We plan to continue improving our cost structure by identifying synergies among departments and strengthening our supply chain. We are executing on the following supply chain initiatives to drive improvements in product costs: (i) developing a sourcing network in new territories that can offer better costs; (ii) consolidating and building strategic partnerships with high-quality suppliers to gain scale efficiencies; and (iii) implementing a global fabric platforming process for each of the regional design offices to develop and utilize common fabrics across multiple styles creating a consistently high quality global offer for our wholesale and retail customers. We are also working to shorten our lead times through partnering with our suppliers, exercising agility in the production process and continuously searching for new suppliers and sourcing opportunities in reaction to the latest trends.
We are also focused on improving the profitability of our retail business in the Americas. As almost two-thirds our leases in Americas Retail are up for renewal or have lease exit options over the next three years, we continue to have the flexibility to further optimize our retail footprint, as appropriate, in the coming years. However, we are not restricting ourselves to waiting for these dates to close stores or renegotiate rents. For example, during fiscal 2018, we modified certain of our leases held with a common landlord that had original lease end dates from fiscal 2018 to fiscal 2026 to now end in fiscal 2018 through fiscal 2020, in order to accelerate the reduction of our retail store footprint in North America.
Stabilizing our Wholesale Business. We are partnering with our wholesale customers to emphasize a retail-oriented mindset and encourage the adoption of best practices, including high quality visual merchandising, frequent rotation of products and maximization of inventory turns.
Capital Allocation
The Company’sWe plan to continue to prioritize capital allocation toward investments that support growth and infrastructure, while remaining highly disciplined in the way we allocate capital for the full fiscal year 2019 are planned between $85across projects, including new store development, store remodels, technology and logistics investments and others. When we prioritize investments, we will focus on their strategic significance and their return on invested capital expectations. We also plan to manage product buys and inventory ownership rigorously and optimize overall working capital management consistently. In addition, we plan to continue to return value to shareholders through dividends and opportunistic share repurchases.
On November 23, 2021, we announced an increase to our regular quarterly cash dividend from $0.1125 to $0.225 per share on our common stock. We also repurchased shares of our common stock in open market and privately negotiated transactions totaling $51.0 million and $95$38.8 million during fiscal 2022 and 2021, respectively.
On March 14, 2022, the Board of Directors expanded its repurchase authorization by $100 million, leaving a new capacity of $249.0 million. The planned investments in capital are primarily related to retail and e-commerce expansion in Europe and Asia as well as continued investments in technology to support our long-term growth plans.In connection with this expanded authorization, we entered into the 2022 ASR Contract with a financial institution under which it will repurchase $175.0 million of its common stock.
Comparable Store Sales
The Company reportsExcept as described below in connection with the COVID-19 pandemic, we report National Retail Federation calendar comparable store sales on a quarterly basis for our retail businesses which include the combined results from our brick-and-mortar retail stores and our e-commerce sites. We also separately report the impact of e-commerce sales on our comparable store sales metric. As a result of our omni-channel strategy, our e-commerce business has become strongly intertwined with our brick-and-mortar retail store business. Therefore, we believe that the inclusion of e-commerce sales in our comparable store sales metric provides a more meaningful representation of our retail results.
Sales from our brick-and-mortar retail stores include purchases that are initiated, paid for and fulfilled at our retail stores and directly operated concessions as well as merchandise that is reserved online but paid for and picked-up at our retail stores. Sales from our e-commerce sites include purchases that are initiated and paid for online and shipped from either our distribution centers or our retail stores as well as purchases that are initiated in a retail store, but due to inventory availability at the retail store, are ordered and paid for online and shipped from our distribution centers or picked-up from a different retail store.
Store sales are considered comparable after the store has been open for 13 full fiscal months. If a store remodel results in a square footage change of more than 15%, or involves a relocation or a change in store concept, the store sales are removed from the comparable store base until the store has been opened at its new size, in its new location or under its new concept for 13 full fiscal months. Stores that are permanently closed or temporarily closed (including as a result of pandemic-related closures) for more than seven days in any fiscal month are excluded from the calculation in the fiscal month that they are closed. E-commerce sales are considered comparable after the online site has been operational in a country for 13 full fiscal months and exclude any related revenue from shipping fees.
The comparable stores sales These criteria are consistent with the metric used by management for fiscal 2018 have been adjustedinternal reporting and analysis to compare to the appropriate week in the prior year as a resultmeasure performance of the additional week included in fiscal 2018.
store or online sites. Definitions and calculations of comparable store sales used by the Companyus may differ from similarly titled measures reported by other companies.
As a result of significant and varying temporary store closures and other various restrictions during the COVID-19 pandemic, we have not disclosed any comparable store sales measures when discussing the results of operations for fiscal 2022 compared to fiscal 2021. We believe that comparable store sales measures between these fiscal years are not meaningful to the evaluation of our results due to such COVID-19 restrictions.
Executive Summary
Overview
Given the significant impacts to our business that began in fiscal 2021 as a result of the COVID-19 pandemic, this Executive Summary includes highlights of our performance for fiscal 2022 compared to both (a) fiscal 2020 (the pre-COVID period from two years prior) and (b) fiscal 2021 (the COVID-impacted period from one year ago). Management believes the additional comparison to the two-year ago period is helpful to provide additional context to the current year results.
Net earnings attributable to Guess?, Inc. increased 78.5% to $171.4 million, or diluted earnings per share (“EPS”) of $2.57, for fiscal 2022 compared to $96.0 million, or diluted EPS of $1.33 for fiscal 2020. Net earnings attributable to Guess?, Inc. was $171.4 million for fiscal 2022, compared to net loss attributable to Guess?, Inc. was $7.9of $81.2 million, or diluted loss of $0.11$1.27 per common share for fiscal 2018, compared to net earnings attributable to Guess?, Inc. of $22.8 million, or diluted earnings of $0.27 per common share, for fiscal 2017.2021.
During fiscal 2018, the Company2022, we recognized $3.1 million of asset impairment charges; $2.7 million net lossesof certain professional service and legal fees and related (credits) costs; $0.3 million net gains on lease terminationsmodifications; $11.1 million of $11.4amortization of debt discount related to our Notes; and $10.6 million asset impairment charges of $8.5 million andin additional income tax expense from certain discrete income tax adjustments related primarily to an intra-entity transfer of $47.9 million relatedintellectual property rights to the enactment of the Tax Reforma wholly-owned Swiss subsidiary (or a combined $66.3$23.3 million, or $0.35 per share impact, negative impact after considering the related income tax benefit of $1.4$4.0 million resulting from the net losses on lease terminations and asset impairment charges), resulting in an unfavorable impact of $0.81 per share.these adjustments). Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were $58.4was $194.7 million and adjusted diluted earnings were $0.70was $2.92 per common share for fiscal 2018. During fiscal 2017, the Company recognized asset impairment charges of $34.4 million, restructuring charges of $6.1 million, a restructuring related estimated exit tax charge of $1.9 million and a valuation allowance established on certain deferred tax assets of $6.8 million, partially offset by a gain from the sale of a minority interest investment of $22.3 million and net gains on lease terminations of $0.7 million (or a combined $16.0 million after considering the net $10.2 million tax benefit resulting from the asset impairment charges, restructuring charges, the sale of the minority interest investment and net gains on lease terminations), resulting in an unfavorable impact of $0.19 per share. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were $38.8 million and adjusted diluted earnings were $0.46 per common share for fiscal 2017.2022. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under “Non-GAAP Measures.”
Correction of Immaterial ErrorFiscal 2022 Results Compared to Fiscal 2020
DuringFor the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales to reflect its proper treatment as a reduction of the cost of such licensed product. Accordingly, prior period amounts related to net royalties, net revenue and cost of product sales have been adjusted to conform to the current period presentation. This resulted in a decrease to net revenue and cost of product sales of $18.9 million and $19.8 million during fiscal 2017 and fiscal 2016, respectively. This reclassification had no impact on previously reported earnings from operations,year ended January 29, 2022, we recorded net earnings attributableof $171.4 million, compared to Guess?, Inc. or$96.0 million for the fiscal year ended February 1, 2020. Diluted EPS was $2.57 for the fiscal year ended January 29, 2022, compared to $1.33 for the fiscal year ended February 1, 2020. We estimate a net earnings per share. Refer to Note 1 topositive impact from our share buybacks and convertible notes transaction of $0.29 and a negative currency impact of $0.36 on diluted EPS for the Consolidated Financial Statements for further information regarding this reclassification.
Highlights of the Company’s performance for fiscal 2018year ended January 29, 2022 when compared to the priorfiscal year are presented below, followed by a more comprehensive discussion under “Results of Operations”:ended February 1, 2020.
Operations
Net Revenue. Total net revenue increased 7.9%for fiscal 2022 decreased 3.2% to $2.36$2.59 billion, from $2.68 billion for the fiscal 2018,year ended February 1, 2020. In constant currency, net revenue decreased by 4.9%.
Earnings from Operations. Earnings from operations for fiscal 2022 were $305.0 million (including $0.3 million net gains on lease modifications, $3.1 million in non-cash impairment charges taken on certain long-lived store related assets and a $7.4 million unfavorable currency translation impact), compared to $2.19$140.7 million (including $10.0 million in non-cash impairment charges taken on certain long-lived store related assets) for the fiscal year ended February 1, 2020. Operating margin for fiscal 2022 increased 6.5% to 11.8%, from 5.3% for the fiscal year ended February 1, 2020, driven primarily by higher initial markups, lower markdowns, and lower occupancy costs. The negative impact of currency on operating margin for fiscal 2022was approximately 40 basis points.
Other Expense, Net. Other expense, net for fiscal 2022 was $30.2 million compared to $2.5 million for fiscal 2020. The change was primarily due to higher net unrealized and realized losses from foreign currency exposures.
Fiscal 2022 Results Compared to Fiscal 2021
For the fiscal year ended January 29, 2022, we recorded net earnings of $171.4 million, compared to net loss of $81.2 million for the fiscal year ended January 30, 2021. Diluted EPS was $2.57 for the fiscal year ended January 29, 2022, compared to diluted loss per share of $1.27 for fiscal 2021. We estimate a net positive impact from our share buybacks and our convertible notes transaction of $0.06 and a negative impact from currency of $0.19 on diluted EPS for the fiscal year ended January 29, 2022 when compared to fiscal 2021.
Net Revenue. Total net revenue for fiscal 2022 increased 38.1% to $2.59 billion, from $1.88 billion in the prior year.fiscal 2021. In constant currency, net revenue increased by 5.3%37.0%.
Gross margin (gross profit as a percentage of total net revenue) increased 110 basis points to 35.1%Earnings (Loss) from Operations. Earnings from operations for fiscal 2018, compared to 34.0% in the prior year.
Selling, general and administrative (“SG&A”) expenses as a percentage of total net revenue (“SG&A rate”) increased 40 basis points to 31.5% for fiscal 2018, compared to 31.1% in the prior year. SG&A expenses increased 9.0% to $743.82022 were $305.0 million for fiscal 2018, compared to $682.6(including $0.3 million in the prior year.
During fiscal 2018, the Company recognized net losses on lease terminations of $11.4 million, compared to net gains on lease terminations of $0.7modifications, $3.1 million in the prior year.
During fiscal 2018, the Company recognized assetnon-cash impairment charges taken on certain long-lived store related assets and a $4.9 million unfavorable currency translation impact), compared to loss from operations of $8.5$60.5 million (including $2.8 million net gains on lease modifications and $80.4 million in non-cash impairment charges taken on certain long-lived store related assets) in fiscal 2021. Operating margin for fiscal 2022 increased 15.0% to 11.8%, from negative 3.2% in fiscal 2021, driven primarily by overall leveraging of expenses, lower non-cash impairment charges and lower markdowns. The positive impact of currency on operating margin for the fiscal year ended January 29, 2022 was approximately 10 basis points.
Other Expense, Net. Other expense, net for fiscal 2022 was $30.2 million compared to $34.4 million in the prior year.
The Company incurred $6.1 million in restructuring charges during fiscal 2017.
Operating margin increased 180 basis points to 2.8% for fiscal 2018, compared to 1.0% in the prior year. Lower asset impairment charges recorded during fiscal 2018 favorably impacted operating margin by 130 basis points compared to the prior year. Restructuring charges incurred during the prior year negatively impacted operating margin by 30 basis points in fiscal 2017. Higher net losses on lease terminations recorded during 2018 negatively impacted operating margin by 50 basis points compared to the prior year. Earnings from operations increased 187.0% to $65.2$6.0 million for fiscal 2018, compared2021. The change was primarily due to $22.7 million in the prior year.
Other income,higher net (including interest incomeunrealized and expense), totaled $5.1 million for fiscal 2018, compared to $30.9 million in the prior year. During fiscal 2017, the Company recorded a gain of $22.3 million in other income, net related to the sale of a minority interest investment.realized losses from foreign currency exposures.
The effective income tax rate increased 53.0% to 105.6% for fiscal 2018, compared to 52.6% in the prior year. The Company’s effective tax rate for 2018 included additional income tax expense of $47.9 million related to the enactment of the Tax Reform, which negatively impacted the Company’s effective tax rate by 68.2% in fiscal 2018. The Company’s effective tax rate for fiscal 2017 included the impact of a valuation allowance established on certain deferred tax assets of $6.8 million and an estimated exit tax charge of $1.9 million related to the Company’s reorganization in Europe as a result of the global cost reduction and restructuring plan. These items negatively impacted the Company’s effective tax rate by 16.3% in fiscal 2017.
Key Balance Sheet Accounts
The Company•We had $367.4$415.6 million in cash and cash equivalents as of January 29, 2022, compared to $469.1 million in cash and cash equivalents and $0.2 million in restricted cash at January 30, 2021.
◦For the intra-entity transfer of the intellectual property rights, we made U.S. income tax payments of $107.2 million during fiscal 2022.
◦We had $48.3 million in outstanding borrowings under our term loans as of February 3, 2018,January 29, 2022, compared to $396.1$56.8 million as of January 30, 2021, and $12.2 million in cash and cash equivalents and $1.5outstanding borrowings under our credit facilities as of January 29, 2022, compared to $7.3 million in restricted cash atas of January 28, 2017.30, 2021.
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◦ | The Company invested $56.1 million to repurchase 3,866,387 of its common shares during fiscal 2018, of which $6.0 million was settled subsequent to year end. During fiscal 2017, the Company invested $3.5 million to repurchase 289,968 of its common shares. |
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◦ | During fiscal 2018, the Company made up-front payments of approximately $22 million related to the modification of certain lease agreements held with a common landlord in North America. |
◦During fiscal 2022, we repurchased 2.3 million shares of our common stock for $51.0 million compared to 4.0 million shares of our common stock for $38.8 million during fiscal 2021.
•Accounts receivable which consists of trade receivables relating primarily to the Company’sour wholesale business in Europe and, to a lesser extent, to itsour wholesale businesses in Asiathe Americas and the Americas,Asia, royalty receivables relating to itsour licensing operations, credit card and retail concession receivables related to itsour retail businesses and certain other receivables,receivables. Accounts receivable increased by $34.5$14.7 million, or 15.3%4.7%, to $260.0$328.9 million as of February 3, 2018,January 29, 2022, compared to $225.5$314.1 million at January 28, 2017.30, 2021. On a constant currency basis, accounts receivable increased by $4.7$40.7 million, or 2.1%12.9%.
•Inventory increasedincreased by $60.9$73.2 million,, or 16.6%18.8%, to $428.3$462.3 million as of February 3, 2018, compared to $367.4January 29, 2022, from $389.1 million at January 28, 2017.30, 2021. On a constant currency basis, inventory increased by $21.1$99.7 million, or 5.8%25.6%.
the global supply chain disruptions and elongated transit times.
Global Store Count
In fiscal 2018,2022, together with our partners, we opened 165160 new stores worldwide, consisting of 8490 stores in Europe and the Middle East, 6360 stores in Asia and the Pacific, 11nine stores in the U.S., and one store in Central and South America, five stores in the U.S. and two stores in Canada.America. Together with our partners, we closed 18299 stores worldwide, consisting of 7343 stores in Asia and the Pacific, 4436 stores in Europe and the Middle East, 3815 stores in the U.S., 24two stores in Canada and three stores in Central and South America.
We ended fiscal 20182022 with 1,6631,631 stores and 429337 concessions worldwide, comprised as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stores | | Concessions |
Region | | Total | | Directly Operated | | Partner Operated | | Total | | Directly Operated | | Partner Operated |
United States | | 245 | | | 245 | | | — | | | 1 | | | — | | | 1 | |
Canada | | 74 | | | 74 | | | — | | | — | | | — | | | — | |
Central and South America | | 103 | | | 69 | | | 34 | | | 29 | | | 29 | | | — | |
Total Americas | | 422 | | | 388 | | | 34 | | | 30 | | | 29 | | | 1 | |
Europe and the Middle East | | 779 | | | 556 | | | 223 | | | 50 | | | 50 | | | — | |
Asia and the Pacific | | 430 | | | 124 | | | 306 | | | 257 | | | 99 | | | 158 | |
Total | | 1,631 | | | 1,068 | | | 563 | | | 337 | | | 178 | | | 159 | |
|
| | | | | | | | | | | | | | | | | | |
| | Stores | | Concessions |
Region | | Total | | Directly Operated | | Partner Operated | | Total | | Directly Operated | | Partner Operated |
United States | | 308 |
| | 306 |
| | 2 |
| | 1 |
| | — |
| | 1 |
|
Canada | | 89 |
| | 89 |
| | — |
| | — |
| | — |
| | — |
|
Central and South America | | 103 |
| | 59 |
| | 44 |
| | 27 |
| | 27 |
| | — |
|
Total Americas | | 500 |
| | 454 |
| | 46 |
| | 28 |
| | 27 |
| | 1 |
|
Europe and the Middle East | | 669 |
| | 400 |
| | 269 |
| | 33 |
| | 33 |
| | — |
|
Asia and the Pacific | | 494 |
| | 157 |
| | 337 |
| | 368 |
| | 177 |
| | 191 |
|
Total | | 1,663 |
| | 1,011 |
| | 652 |
| | 429 |
| | 237 |
| | 192 |
|
Of the total 1,6631,631 stores, 1,3161,351 were GUESS? stores, 219183 were GUESS? Accessories stores, 7059 were G by GUESS (GbG) stores and 5838 were MARCIANO stores.
Results of Operations
The following table sets forth actual operating results for the fiscal years 2018, 2017 and 2016 as a percentage of net revenue:
|
| | | | | | | | |
| Year Ended |
| Feb 3, | | Jan 28, | | Jan 30, |
| 2018 | | 2017 (1) | | 2016 (1) |
Product sales | 96.9 | % | | 96.7 | % | | 96.2 | % |
Net royalties (1) | 3.1 |
| | 3.3 |
| | 3.8 |
|
Net revenue (1) | 100.0 |
| | 100.0 |
| | 100.0 |
|
Cost of product sales (1) | 64.9 |
| | 66.0 |
| | 64.0 |
|
Gross profit | 35.1 |
| | 34.0 |
| | 36.0 |
|
Selling, general and administrative expenses | 31.5 |
| | 31.1 |
| | 30.4 |
|
Net (gains) losses on lease terminations | 0.5 |
| | (0.0 | ) | | (0.1 | ) |
Asset impairment charges | 0.3 |
| | 1.6 |
| | 0.1 |
|
Restructuring charges | — |
| | 0.3 |
| | — |
|
Earnings from operations | 2.8 |
| | 1.0 |
| | 5.6 |
|
Interest expense | (0.1 | ) | | (0.1 | ) | | (0.1 | ) |
Interest income | 0.2 |
| | 0.1 |
| | 0.0 |
|
Other income, net | 0.1 |
| | 1.4 |
| | 0.3 |
|
Earnings before income tax expense | 3.0 |
| | 2.4 |
| | 5.8 |
|
Income tax expense | 3.2 |
| | 1.2 |
| | 1.9 |
|
Net earnings (loss) | (0.2 | ) | | 1.2 |
| | 3.9 |
|
Net earnings attributable to noncontrolling interests | 0.1 |
| | 0.2 |
| | 0.2 |
|
Net earnings (loss) attributable to Guess?, Inc. | (0.3 | )% | | 1.0 | % | | 3.7 | % |
| |
(1) | During the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales. Accordingly, amounts related to net royalties, net revenue and cost of product sales as well as operating results as percentage of net revenue have been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation. Refer to Note 1 to the Consolidated Financial Statements for further information. |
Fiscal 20182022 Compared to Fiscal 20172021
Consolidated Results
The following presents our condensed consolidated statements of income (loss) (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2022 | | Fiscal 2021 | | | |
| $ | | % | | $ | | % | | $ change | % change |
Net revenue | $ | 2,591,631 | | | 100.0 | % | | $ | 1,876,529 | | | 100.0 | % | | $ | 715,102 | | 38.1 | % |
Cost of product sales | 1,422,126 | | | 54.9 | % | | 1,179,427 | | | 62.9 | % | | 242,699 | | 20.6 | % |
Gross profit | 1,169,505 | | | 45.1 | % | | 697,102 | | | 37.1 | % | | 472,403 | | 67.8 | % |
| | | | | | | | | | |
Selling, general and administrative expenses | 861,578 | | | 33.2 | % | | 679,958 | | | 36.1 | % | | 181,620 | | 26.7 | % |
Asset impairment charges | 3,149 | | | 0.1 | % | | 80,442 | | | 4.3 | % | | (77,293) | | (96.1 | %) |
Net gains on lease modifications | (259) | | | (0.0 | %) | | (2,801) | | | (0.1 | %) | | 2,542 | | (90.8 | %) |
Earnings (loss) from operations | 305,037 | | | 11.8 | % | | (60,497) | | | (3.2 | %) | | 365,534 | | (604.2 | %) |
Interest expense, net | (21,137) | | | (0.8 | %) | | (20,632) | | | (1.1 | %) | | (505) | | 2.4 | % |
Other expense, net | (30,171) | | | (1.2 | %) | | (5,950) | | | (0.3 | %) | | (24,221) | | 407.1 | % |
Earnings (loss) before income tax expense (benefit) | 253,729 | | | 9.8 | % | | (87,079) | | | (4.6 | %) | | 340,808 | | (391.4 | %) |
Income tax expense (benefit) | 73,680 | | | 2.9 | % | | (6,338) | | | (0.3 | %) | | 80,018 | | (1262.5 | %) |
Net earnings (loss) | 180,049 | | | 6.9 | % | | (80,741) | | | (4.3 | %) | | 260,790 | | (323.0 | %) |
Net earnings attributable to noncontrolling interests | 8,686 | | | 0.3 | % | | 488 | | | 0.0 | % | | 8,198 | | 1679.9 | % |
Net earnings (loss) attributable to Guess?, Inc. | $ | 171,363 | | | 6.6 | % | | $ | (81,229) | | | (4.3 | %) | | 252,592 | | (311.0 | %) |
| | | | | | | | | | |
Net earnings (loss) per common share attributable to common stockholders: | | | |
Basic | $ | 2.65 | | | | | $ | (1.27) | | | | | $ | 3.92 | | |
Diluted | $ | 2.57 | | | | | $ | (1.27) | | | | | $ | 3.84 | | |
| | | | | | | | | | |
Effective income tax rate | 29.0 | % | | | | 7.3 | % | | | | | |
Net Revenue. Net revenue increased by $173.3 million, or 7.9%, to $2.36 billion for fiscal 2018, compared to $2.19 billion in fiscal 2017. In constant currency, net revenue increased by 5.3% as currency37.0%. Approximately 40% of the increase was driven by higher wholesale shipments, 30% from temporary store closures in fiscal 2021, and 20% from higher comparable store revenue. The remaining increase was driven by higher e-commerce, new store development, and licensing revenues, partially offset by permanent store closures. Currency translation fluctuations relating to our foreign operations favorably impacted net revenue by $58.3$21.3 million compared to the prior year. The increase was driven primarily by retail expansion and positive comparable sales in our international markets and, to a lesser extent, from higher European wholesale shipments and the favorable impact on revenue from the additional week in the current year, partially offset by negative comparable sales in Americas Retail.
Gross Margin. Gross margin increased 110 basis points to 35.1%8.0% for fiscal 2018,2022, compared to 34.0% in fiscal 2017,2021, of which 80 basis points5.6% was due to a lower occupancy rate and 30 basis points2.3% was due to higher overall product margins.margin. The lowerfavorable decrease in occupancy rate was due primarily to cost reductions due primarily to store closures and negotiated rent reductions in Americas Retail and, to a lesser extent, overalldriven by higher leveraging of expenses partiallyby 430 basis points due to higher revenues and the remaining mainly from lower distribution expense. The favorable product margin was driven by 220 basis points in improvement from lower markdowns and 100 basis points in improvement in higher initial markups, offset by the negative impact on the fixed cost structure resulting from negative comparable store sales110 basis points in Americas Retail. The higher overall product margins were driven primarily by higher overall initial markups.freight costs.
Gross Profit. Gross profit increased by $83.8$472.4 million, or 11.2%67.8%, to $828.8 million for fiscal 2018, compared to $745.0$697.1 million in fiscal 2017. The2021. Nearly 90% of the increase in gross profit, which included thea favorable impact offrom currency translation, was due primarily todriven by an increase in higher net revenue and the favorable impact on gross profit fromremaining increase was driven by lower markdowns and higher revenue.initial markups, partially offset by higher freight expense. Currency translation fluctuations relating to our foreign operations favorably impacted gross profit by $22.5$3.9 million.
The Company includesWe include inbound freight charges, purchasing costs and related overhead, retail store occupancy costs, including rentlease costs and depreciation and amortization, and a portion of the Company’sour distribution costs related to itsour retail business in cost of product sales. The CompanyWe also includesinclude net royalties received on the Company’sour inventory purchases of licensed product as a reduction to cost of product sales. The Company’sOur gross margin may not be comparable to that of other entities since some entities include all of the costs related to their distribution in cost of product sales and others, like the Company,us, generally exclude wholesale-related distribution costs from gross margin, including them instead in selling, general and administrative (“SG&A&A”) expenses. Additionally, some entities include retail store occupancy costs in SG&A expenses and others, like the Company,us, include retail store occupancy costs in cost of product sales.
SG&A Rate. The Company’sOur SG&A rate increased 40decreased 2.9% for fiscal 2022, compared to fiscal 2021. The favorable SG&A rate was driven by 520 basis points favorable impact resulting from an overall leveraging of expenses due to 31.5% for fiscal 2018, compared to 31.1% in fiscal 2017, driven primarily by higher performance-based compensation costs,revenues partially offset by overall leveraging of expenses.higher discretionary expenses and performance-based compensation and higher government subsidies received in fiscal 2021.
SG&A Expenses. SG&A expenses increased by $61.2 million, or 9.0%, to $743.8$181.6 million for fiscal 2018,2022 compared to $682.6 million in fiscal 2017. The2021. Approximately 60% of the increase, which included thean unfavorable impact offrom currency translation, was driven primarily by expenses resulting from higher net revenues, 20% from higher discretionary expenses and the remaining increase from higher performance-based compensation costs and to a lesser extent, higher distribution costs resulting from the relocation of the Company’s European distribution center.government subsidies received in fiscal 2021. Currency translation fluctuations relating to our foreign operations unfavorably impacted SG&A expenses by $14.0$9.0 million.
Net Gains (Losses) on Lease Terminations. Asset Impairment Charges. During fiscal 2018, the Company2022, we recognized net losses on lease terminations of $11.4 million, compared to net gains on lease terminations of $0.7 million in impairment of certain operating lease right-of-use assets and $2.4 million in impairment of property and equipment related to certain retail locations resulting from lower revenue and future cash flow projections. This compares to $45.4 million in impairment of certain operating lease right-of-use assets and $35.0 million in impairment of property and equipment related to certain retail locations resulting from lower revenue and future cash flow projections from the prior year. The net losses on lease terminationsongoing effects of the COVID-19 pandemic during fiscal 2018 related primarily to the modification of certain lease agreements held with a common landlord in North America.2021. Currency translation fluctuations relating to our foreign operations unfavorablyfavorably impacted net losses on lease terminations by $0.3 million.
Asset Impairment Charges. During fiscal 2018, the Company recognized asset impairment charges of $8.5by $0.2 million compared to $34.4 million in the prior year. The higher asset impairment charges during fiscal 20172022.
Net Gains on Lease Modifications. During fiscal 2022, we recorded net gains on lease modifications of $0.3 million related primarily to the impairmentearly termination of lease agreements for certain of our retail locations in North America resulting from under-performance and expected store closures.
Restructuring Charges. There were no restructuring charges incurred during fiscal 2018.locations. During fiscal 2017, the Company incurred restructuring charges2021, we recorded net gains on lease modifications of $6.1$2.8 million.
Operating Margin. Operating margin increased 180 basis points15.0% to 2.8%11.8% for fiscal 2018,2022, compared to 1.0%negative 3.2% in fiscal 2017.2021. Lower asset impairment charges recorded during fiscal 20182022 favorably impacted operating margin by 130 basis points compared to the prior year. Restructuring charges incurred during the prior year negatively impacted operating margin by 30 basis points in fiscal 2017. Higher net losses on lease terminations recorded during 2018 negatively impacted operating margin by 50 basis points4.2% compared to the prior year. Excluding the impact of these items, operating margin increasedimproved by 70 basis points10.9% compared to the prior year. Currency exchange rate fluctuations favorably impactedThe favorable operating margin was driven by 700 basis points leveraging of expenses, 220 basis points from lower markdowns, and 100 basis points from higher initial markups. The positive impact of currency on operating margin for fiscal 2022 was approximately 3010 basis points.
Earnings (Loss) from Operations. Earnings from operations increased by $42.5 million, or 187.0%, to $65.2was $305.0 million for fiscal 2018,2022, compared to $22.7loss from operations of $60.5 million in fiscal 2017.2021. Currency translation fluctuations relating to our foreign operations favorablyunfavorably impacted earnings from operations by $8.1$4.9 million.
Interest Income (Expense),Expense, Net. Interest income,expense, net, was $1.7$21.1 million for fiscal 2018,2022, compared to minimal$20.6 million in fiscal 2021. The increase in interest expense net, in fiscal 2017was due primarily to higher amortization of debt discount and includes the impact of hedge ineffectiveness of foreign exchange currency contracts designated as cash flow hedges. higher interest expense related to our convertible senior notes.
Other Income,Expense, Net. Other income,expense, net, was $3.4$30.2 million for fiscal 2018,2022, compared to $30.9$6.0 million for fiscal 2021. The change was driven by market volatility which resulted in fiscal 2017. Other income, net in fiscal 2018 consisted primarilyhigher unrealized losses on the translation of unrealized gains on non-operating assets and net unrealized mark-to-market revaluation gains on foreign currency balances partially offset by net realized and unrealized mark-to-market revaluation losses on foreign exchange currency contracts. Other income, net in fiscal 2017 consisted primarily of a realized gain of $22.3 million from the sale of a minority interest investment.compared to prior year.
Income Tax Expense. Expense (Benefit). Income tax expense for fiscal 20182022 was $74.2$73.7 million, or a 105.6%29% effective income tax rate, compared to $28.2income tax benefit of $6.3 million, or a 52.6%7.3% effective income tax rate, in fiscal 2017.2021. The increasechange in the effective income tax rate was due primarily due to incomea shift in the distribution of earnings among our tax adjustments madejurisdictions and the reduction in valuation reserves during fiscal 2018 as a result of the enactment of the Tax Reform. These adjustments included a $24.9 million charge for the provisional re-measurement of certain deferred taxes and related amounts and a provisional charge of $23.0 million to income tax expense for the estimated effects of the transitional tax on the deemed repatriation of foreign earnings. These items negatively impacted the Company’s effective tax rate by 68.2% in fiscal 2018. The Company’s effective tax rate for fiscal 2017 included the impact of a valuation allowance established on certain deferred tax assets of $6.8 million, a portion of which was generated from asset impairment charges recorded during fiscal 2017, and an estimated exit tax charge of $1.9 million related2022, compared to the Company’s reorganization in Europe as a result of the global cost reduction and restructuring plan. These items negatively impacted the Company’s effective tax rate by 16.3% in fiscal 2017.prior year.
Net Earnings Attributable to Noncontrolling Interests. Net earnings attributable to noncontrolling interests for fiscal 20182022 was $4.0$8.7 million, net of taxes, compared to $2.6$0.5 million, net of taxes, in fiscal 2017.2021.
Net Earnings (Loss) Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. for fiscal 2022 increased $252.6 million, compared to net loss attributable to Guess?, Inc. was $7.9 millionin fiscal 2021. Diluted EPS increased $3.84 for fiscal 2018,2022, compared to net earnings attributable to Guess?, Inc. of $22.8 million in fiscal 2017. Diluteddiluted loss per share was $0.11in fiscal 2021. We estimate a net positive impact from share buybacks and our convertible senior notes transaction of $0.06 for fiscal 2018, compared to2022. We also estimate a negative impact of currency on diluted earnings per share for fiscal 2022 was approximately $0.19 per share.
Refer to “Non-GAAP Measures” for an overview of $0.27 inour non-GAAP, or adjusted, financial results for fiscal 2017. During2022 and fiscal 2018, the Company recognized net losses on lease terminations of $11.4 million, asset impairment charges of $8.5 million and additional income tax charges totaling $47.9 million related to the Tax Reform (or a combined $66.3 million after considering the related tax benefit of $1.4 million resulting from the net losses on lease terminations and asset impairment charges), or an unfavorable $0.81 per share impact.2021. Excluding the impact of these non-GAAP items, adjusted net earnings attributable to Guess?, Inc. were $58.4increased $199.2 million and adjusted diluted earnings were $0.70 per common shareEPS increased $2.99 for the fiscal 2018. We estimate that the positive impact from currency fluctuations on diluted loss per common share for fiscal 2018 was approximately $0.02 per share. During fiscal 2017, the Company recognized asset impairment charges of $34.4 million, restructuring charges of $6.1 million, a restructuring related estimated exit tax charge of $1.9 million and a valuation allowance established on certain deferred tax assets of $6.8 million, partially offset by a gain from the sale of a minority interest investment of $22.3 million and net gains on lease terminations of $0.7 million (or a combined $16.0 million after considering the net $10.2 million tax benefit resulting from the asset impairment charges, restructuring charges, the sale of the minority interest investment and net gains on lease terminations), or an unfavorable $0.19 per share impact. Excluding the impact of these items,2022 compared to adjusted net earningsloss attributable to Guess?, Inc. were $38.8 million and adjusted diluted earnings were $0.46loss per common share for fiscal 2017. References to financial results excluding the2021. We estimate our share buybacks and convertible notes transaction had a net positive impact of these items are non-GAAP measures$0.08 and are addressed below under “Non-GAAP Measures.”
currency had a negative impact of $0.19 on adjusted diluted EPS during fiscal 2022 when compared to fiscal 2021.
Information by Business Segment
The following table presents our net revenue and earnings (loss) from operations by segment for the last two fiscal years (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Fiscal 2018 | | Fiscal 2017 | | Change | | % Change |
Net revenue: | | | | | | | |
Americas Retail | $ | 833,077 |
| | $ | 935,479 |
| | $ | (102,402 | ) | | (10.9 | %) |
Americas Wholesale (1) | 150,366 |
| | 146,260 |
| | 4,106 |
| | 2.8 |
|
Europe (1) | 998,657 |
| | 788,194 |
| | 210,463 |
| | 26.7 |
|
Asia (1) | 308,899 |
| | 248,601 |
| | 60,298 |
| | 24.3 |
|
Licensing (2) | 72,755 |
| | 71,919 |
| | 836 |
| | 1.2 |
|
Total net revenue (2) | $ | 2,363,754 |
| | $ | 2,190,453 |
| | $ | 173,301 |
| | 7.9 | % |
Earnings (loss) from operations: | | | | | | |
|
Americas Retail (1) | $ | (17,301 | ) | | $ | (22,816 | ) | | $ | 5,515 |
| | 24.2 | % |
Americas Wholesale (1) | 25,161 |
| | 24,190 |
| | 971 |
| | 4.0 |
|
Europe (1) | 87,376 |
| | 56,961 |
| | 30,415 |
| | 53.4 |
|
Asia (1) | 14,116 |
| | (2,381 | ) | | 16,497 |
| | 692.9 |
|
Licensing (1) | 78,102 |
| | 80,386 |
| | (2,284 | ) | | (2.8 | ) |
Total segment earnings from operations | 187,454 |
| | 136,340 |
| | 51,114 |
| | 37.5 |
|
Corporate overhead (1) | (102,429 | ) | | (73,859 | ) | | (28,570 | ) | | 38.7 |
|
Net gains (losses) on lease terminations (1) | (11,373 | ) | | 695 |
| | (12,068 | ) | | |
Asset impairment charges (1) | (8,479 | ) | | (34,385 | ) | | 25,906 |
| | |
Restructuring charges | — |
| | (6,083 | ) | | 6,083 |
| | |
Total earnings from operations | $ | 65,173 |
| | $ | 22,708 |
| | $ | 42,465 |
| | 187.0 | % |
Operating margins: | | | | | | | |
Americas Retail | (2.1 | %) | | (2.4 | %) | | | | |
Americas Wholesale (1) | 16.7 | % | | 16.5 | % | | | | |
Europe (1) | 8.7 | % | | 7.2 | % | | | | |
Asia (1) | 4.6 | % | | (1.0 | %) | | | | |
Licensing (1) (2) | 107.3 | % | | 111.8 | % | | | | |
Total Company (2) | 2.8 | % | | 1.0 | % | | | | |
| |
(1)
| During fiscal 2018, net revenue and related costs and expenses for certain globally serviced customers were reclassified into the segment primarily responsible for the relationship. Segment results were also adjusted to exclude corporate performance-based compensation costs, net gains (losses) on lease terminations and asset impairment charges due to the fact that these items are no longer included in the segment results provided to the Company’s chief operating decision maker in order to allocate resources and assess performance. Accordingly, segment results have been adjusted for fiscal 2017 to conform to the current period presentation.
|
| |
(2)
| During the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales. Accordingly, net revenue has been adjusted for fiscal 2017 to conform to the current period presentation. This reclassification had no impact on previously reported earnings from operations. |
Americas Retail
Net revenue from our Americas Retail segment decreased by $102.4 million, or 10.9%, to $833.1 million for fiscal 2018, from $935.5 million in fiscal 2017. In constant currency, net revenue decreased by 11.4% compared to the prior year, driven primarily by the unfavorable impact from negative comparable store sales and, to a lesser extent, store closures. Comparable store sales (including e-commerce) decreased 9% in U.S. dollars and 10% in constant currency. The inclusion of our e-commerce sales had a minimal impact on the comparable store sale percentage in U.S. dollars and constant currency. The store base for the U.S. and Canada decreased by an average of 28 net stores in fiscal 2018 compared to the prior year, resulting in a 5.4% net decrease in average square footage. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites favorably impacted net revenue by $3.9 million.
Operating margin improved 30 basis points to negative 2.1% for fiscal 2018, compared to negative 2.4% in fiscal 2017. This improvement was due to higher gross margins and, to a lesser extent, a lower SG&A rate. The higher gross margins were driven primarily by cost reductions due primarily to store closures and negotiated rent reductions and, to a lesser extent, higher initial markups, partially offset by the negative impact on the fixed cost structure resulting from negative comparable store sales. The lower SG&A rate was due to lower expenses, partially offset by the negative impact on the fixed cost structure resulting from negative comparable store sales.
Loss from operations from our Americas Retail segment improved by $5.5 million, or 24.2%, to $17.3 million for fiscal 2018, compared to $22.8 million in fiscal 2017. The improvement reflects the favorable impact on earnings from lower occupancy costs and lower store selling expenses driven primarily by store closures and, to a lesser extent, negotiated rent reductions, partially offset by the unfavorable impact from lower revenue.
Americas Wholesale
Net revenue from our Americas Wholesale segment increased by $4.1 million, or 2.8%, to $150.4 million for fiscal 2018, compared to $146.3 million in fiscal 2017. In constant currency, net revenue increased by 2.0% compared to the prior year, primarily by higher shipments in our Mexico wholesale business. Currency translation fluctuations relating to our non-U.S. wholesale businesses favorably impacted net revenue by $1.2 million.
Operating margin increased 20 basis points to 16.7% for fiscal 2018, compared to 16.5% in fiscal 2017, due to higher gross margins, partially offset by higher expenses.
Earnings from operations from our Americas Wholesale segment increased by $1.0 million, or 4.0%, to $25.2 million for fiscal 2018, compared to $24.2 million in fiscal 2017. The increase was driven primarily by the favorable impact on earnings from higher revenue and, to a lesser extent, higher gross margins.
Europe
Net revenue from our Europe segment increased by $210.5 million, or 26.7%, to $998.7 million for fiscal 2018, compared to $788.2 million in fiscal 2017. In constant currency, net revenue increased by 20.6% compared to the prior year, driven primarily by the favorable impact from retail expansion and, to a lesser extent, from higher shipments in our European wholesale business, positive comparable sales and the favorable impact on revenue from the additional week in the current year. As of February 3, 2018, we directly operated 400 stores in Europe compared to 336 stores at January 28, 2017, excluding concessions, which represents a 19.0% increase over the prior year. Comparable sales (including e-commerce) increased 11% in U.S. dollars and 6% in constant currency compared to the prior-year period. The inclusion of our e-commerce sales increased the comparable sales percentage by 4% in U.S. dollars and 3% in constant currency. Currency translation fluctuations relating to our European operations favorably impacted net revenue by $47.7 million.
Operating margin increased 150 basis points to 8.7% for fiscal 2018, compared to 7.2% in fiscal 2017, due to a lower SG&A rate, partially offset by lower gross margins. The lower SG&A rate was driven primarily by the favorable impact on the fixed cost structure resulting from overall leveraging of expenses, partially offset by higher distribution costs resulting from the relocation of the Company’s European distribution center. The lower gross margins were driven primarily by higher distribution costs resulting from the relocation of the Company’s European distribution center, partially offset by higher initial markups.
Earnings from operations from our Europe segment increased by $30.4 million, or 53.4%, to $87.4 million for fiscal 2018, compared to $57.0 million in fiscal 2017. The increase was driven primarily by the favorable impact on earnings from higher revenue, partially offset by higher occupancy costs and store selling expenses due to retail expansion and, to a lesser extent, higher distribution costs resulting from the relocation of the Company’s European distribution center. Currency translation fluctuations relating to our European operations favorably impacted earnings from operations by $7.6 million.
Asia
Net revenue from our Asia segment increased by $60.3 million, or 24.3%, to $308.9 million for fiscal 2018, compared to $248.6 million in fiscal 2017. In constant currency, net revenue increased by 22.1% compared to the prior year, driven primarily by retail expansion and, to a lesser extent, positive comparable sales. Comparable sales (including e-commerce) increased 8% in U.S. dollars and 5% in constant currency compared to the prior year. The
inclusion of our e-commerce sales increased the comparable sales percentage by 4% in U.S. dollars and 3% in constant currency. As of February 3, 2018, we and our partners operated 494 stores and 368 concessions in Asia, compared to 504 stores and 384 concessions at January 28, 2017. As of February 3, 2018, we directly operated 157 stores and 177 concessions, compared to 108 directly operated stores and 193 concessions at January 28, 2017. Currency translation fluctuations relating to our Asian operations favorably impacted net revenue by $5.4 million.
Operating margin increased 560 basis points to 4.6% for fiscal 2018, from negative 1.0% in fiscal 2017. The increase in operating margin was due to higher gross margins and, to a lesser extent, a lower SG&A rate driven primarily by overall leveraging of occupancy costs and SG&A expenses.
Earnings from operations from our Asia segment was $14.1 million for fiscal 2018, compared to loss from operations of $2.4 million in fiscal 2017. The increase in earnings from operations was driven by the favorable impact on earnings from higher revenue. Currency translation fluctuations relating to our Asian operations favorably impacted earnings from operations by $0.6 million.
Licensing
Net royalty revenue from our Licensing segment increased by $0.8 million, or 1.2%, to $72.8 million for fiscal 2018, compared to $71.9 million in fiscal 2017.
Earnings from operations from our Licensing segment decreased by $2.3 million, or 2.8%, to $78.1 million for fiscal 2018, from $80.4 million in fiscal 2017.
Corporate Overhead
Unallocated corporate overhead increased by $28.6 million to $102.4 million for fiscal 2018, compared to $73.9 million in fiscal 2017. The increase was driven primarily by higher performance-based compensation costs.
Fiscal 2017 Compared to Fiscal 2016
Consolidated Results
Net Revenue. Net revenue increased by $6.0 million, or 0.3%, to $2.19 billion for fiscal 2017, compared to $2.18 billion in fiscal 2016. In constant currency, net revenue increased by 1.1% as currency translation fluctuations relating to our foreign operations unfavorably impacted net revenue by $17.2 million compared to the prior year.
Gross Margin. Gross margin decreased 200 basis points to 34.0% for fiscal 2017, from 36.0% in fiscal 2016, of which 120 basis points was due to lower overall product margins and 80 basis points was due to a higher occupancy rate. The lower overall product margins were due primarily to more markdowns in Americas Retail. The higher occupancy rate was driven primarily by the negative impact on the Company’s fixed cost structure resulting from negative comparable store sales in Americas Retail.
Gross Profit. Gross profit decreased by $42.4 million, or 5.4%, to $745.0 million for fiscal 2017, from $787.4 million in fiscal 2016. The decrease in gross profit, which included the unfavorable impact of currency translation, was due primarily to lower overall product margins and higher occupancy costs resulting from retail expansion in our international markets. Currency translation fluctuations relating to our foreign operations unfavorably impacted gross profit by $6.5 million.
SG&A Rate. The Company’s SG&A rate increased 70 basis points to 31.1% for fiscal 2017, compared to 30.4% in fiscal 2016, due primarily to the unfavorable impact from segment mix, partially offset by lower performance-based compensation costs.
SG&A Expenses. SG&A expenses increased by $16.5 million, or 2.5%, to $682.6 million for fiscal 2017, compared to $666.1 million in fiscal 2016. The increase, which included the favorable impact of currency translation, was driven by higher investments to support our expansion, partially offset by lower current-year performance-based compensation costs and prior-year charges for legal matters of $7.0 million. Currency translation fluctuations relating to our foreign operations favorably impacted SG&A expenses by $3.6 million.
Net Gains on Lease Terminations. During fiscal 2017, the Company recognized net gains on lease terminations of $0.7 million, compared to $2.3 million in the prior year. The net gains on lease terminations related primarily to the early termination of certain lease agreements in Europe
Asset Impairment Charges. During fiscal 2017, the Company recognized asset impairment charges of $34.4 million, compared to $2.3 million in the prior year. The higher asset impairment charges during fiscal 2017 related primarily to the impairment of certain retail locations in North America resulting from under-performance and expected store closures. Currency translation fluctuations relating to our foreign operations unfavorably impacted asset impairment charges by $0.5 million.
Restructuring Charges. During the first quarter of fiscal 2017, the Company implemented a global cost reduction and restructuring plan to better align its global cost and organizational structure with its current strategic initiatives. This plan included the consolidation and streamlining of the Company’s business processes and a reduction in its global workforce and other expenses. These actions resulted in restructuring charges of $6.1 million incurred during fiscal 2017.
Operating Margin. Operating margin decreased 460 basis points to 1.0% for fiscal 2017, from 5.6% in fiscal 2016. Higher asset impairment charges recorded during fiscal 2017 unfavorably impacted operating margin by 150 basis points compared to the prior year. Restructuring charges negatively impacted operating margin by 30 basis points in fiscal 2017. Lower net gains on lease terminations recorded during fiscal 2017 unfavorably impacted operating margin by 10 basis points compared to the prior year. Currency exchange rate fluctuations negatively impacted operating margin by approximately 70 basis points.
Earnings from Operations. Earnings from operations decreased by $98.6 million, or 81.3%, to $22.7 million for fiscal 2017, from $121.4 million in fiscal 2016. Currency translation fluctuations relating to our foreign operations unfavorably impacted earnings from operations by $3.6 million.
Interest Expense, Net. Interest expense, net was minimal for fiscal 2017, compared to $0.9 million in fiscal 2016 and includes the impact of hedge ineffectiveness of foreign exchange currency contracts designated as cash flow hedges.
Other Income, Net. Other income, net was $30.9 million for fiscal 2017, compared to $6.8 million in fiscal 2016. Other income, net in fiscal 2017 consisted primarily of a realized gain of $22.3 million from the sale of a minority interest investment. Other income, net in fiscal 2016 consisted primarily of net realized and unrealized mark-to-market revaluation gains on foreign exchange currency contracts and realized gains on the sale of other assets, partially offset by net unrealized mark-to-market revaluation losses on foreign currency balances.
Income Tax Expense. Income tax expense for fiscal 2017 was $28.2 million, or a 52.6% effective tax rate, compared to $42.5 million, or a 33.4% effective tax rate, in fiscal 2016. The increase in the effective income tax rate was due primarily to more losses incurred in certain foreign jurisdictions where the Company has valuation allowances, partially offset by the favorable impact of a lower tax rate on the gain from the sale of a minority interest investment during fiscal 2017 compared to the prior year. The Company’s effective tax rate for fiscal 2017 included the impact of a valuation allowance established on certain deferred tax assets of $6.8 million, a portion of which was generated from asset impairment charges recorded during fiscal 2017, and an estimated exit tax charge of $1.9 million related to the Company’s reorganization in Europe as a result of the global cost reduction and restructuring plan. These items negatively impacted the Company’s effective tax rate by 16.3% in fiscal 2017.
Net Earnings Attributable to Noncontrolling Interests. Net earnings attributable to noncontrolling interests for fiscal 2017 was $2.6 million, net of taxes, compared to $3.0 million, net of taxes, in fiscal 2016.
Net Earnings Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. decreased by $59.1 million, or 72.2%, to $22.8 million for fiscal 2017, from $81.9 million in fiscal 2016. Diluted earnings per share decreased to $0.27 per share for fiscal 2017, from $0.96 per share in fiscal 2016. During fiscal 2017, the Company recognized asset impairment charges of $34.4 million, restructuring charges of $6.1 million, a restructuring related estimated exit tax charge of $1.9 million and a valuation allowance established on certain deferred tax assets of $6.8 million,
partially offset by a gain from the sale of a minority interest investment of $22.3 million and net gains on lease terminations of $0.7 million (or a combined $16.0 million after considering the net $10.2 million tax benefit resulting from the asset impairment charges, restructuring charges, the sale of the minority interest investment and net gains on lease terminations), or an unfavorable $0.19 per share impact. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were $38.8 million and adjusted diluted earnings were $0.46 per common share for fiscal 2017. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under “Non-GAAP Measures.” We estimate that the negative impact from currency fluctuations on diluted earnings per common share for fiscal 2017 was approximately $0.13 per share. During fiscal 2016, the Company also recognized net gains on lease terminations of $2.3 million which was mostly offset by asset impairment charges of $2.3 million, resulting in a minimal per share impact.
Information by Business Segment
The following table presents our net revenue and earnings (loss) from operations by segment for fiscal 2017 and fiscal 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Fiscal 2017 | | Fiscal 2016 | | Change | | % Change |
Net revenue: | | | | | | | |
Americas Retail | $ | 935,479 |
| | $ | 981,942 |
| | $ | (46,463 | ) | | (4.7 | %) |
Americas Wholesale (1) | 146,260 |
| | 155,594 |
| | (9,334 | ) | | (6.0 | ) |
Europe (1) | 788,194 |
| | 722,877 |
| | 65,317 |
| | 9.0 |
|
Asia (1) | 248,601 |
| | 240,041 |
| | 8,560 |
| | 3.6 |
|
Licensing (2) | 71,919 |
| | 84,041 |
| | (12,122 | ) | | (14.4 | ) |
Total net revenue (2) | $ | 2,190,453 |
| | $ | 2,184,495 |
| | $ | 5,958 |
| | 0.3 | % |
Earnings (loss) from operations: | | | | | | | |
Americas Retail (1) | $ | (22,816 | ) | | $ | 18,414 |
| | $ | (41,230 | ) | | (223.9 | %) |
Americas Wholesale (1) | 24,190 |
| | 29,579 |
| | (5,389 | ) | | (18.2 | ) |
Europe (1) | 56,961 |
| | 53,673 |
| | 3,288 |
| | 6.1 |
|
Asia (1) | (2,381 | ) | | 10,309 |
| | (12,690 | ) | | (123.1 | ) |
Licensing (1) | 80,386 |
| | 92,189 |
| | (11,803 | ) | | (12.8 | ) |
Total segment earnings from operations | 136,340 |
| | 204,164 |
| | (67,824 | ) | | (33.2 | ) |
Corporate overhead (1) | (73,859 | ) | | (82,864 | ) | | 9,005 |
| | (10.9 | ) |
Net gains (losses) on lease terminations (1) | 695 |
| | 2,337 |
| | (1,642 | ) | |
|
|
Asset impairment charges (1) | (34,385 | ) | | (2,287 | ) | | (32,098 | ) | | |
Restructuring charges | (6,083 | ) | | — |
| | (6,083 | ) | | |
Total earnings from operations | $ | 22,708 |
| | $ | 121,350 |
| | $ | (98,642 | ) | | (81.3 | %) |
Operating margins: | | | | | | | |
Americas Retail (1) | (2.4 | %) | | 1.9 | % | | | | |
Americas Wholesale (1) | 16.5 | % | | 19.0 | % | | | | |
Europe (1) | 7.2 | % | | 7.4 | % | | | | |
Asia (1) | (1.0 | %) | | 4.3 | % | | | | |
Licensing (1) (2) | 111.8 | % | | 109.7 | % | | | | |
Total Company (2) | 1.0 | % | | 5.6 | % | | | | |
| |
(1) | During fiscal 2018, net revenue and related costs and expenses for certain globally serviced customers were reclassified into the segment primarily responsible for the relationship. Segment results were also adjusted to exclude corporate performance-based compensation costs, net gains (losses) on lease terminations and asset impairment charges due to the fact that these items are no longer included in the segment results provided to the Company’s chief operating decision maker in order to allocate resources and assess performance. Accordingly, segment results have been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation.
|
| |
(2) | During the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales. Accordingly, net revenue has been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation. This reclassification had no impact on previously reported earnings from operations. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | | | |
| Fiscal 2022 | | Fiscal 2021 | | $ change | | % change |
Net revenue: | | | | | | | |
Americas Retail | $ | 759,117 | | | $ | 510,806 | | | $ | 248,311 | | | 48.6 | % |
Americas Wholesale | 201,202 | | | 117,607 | | | 83,595 | | | 71.1 | % |
Europe | 1,297,550 | | | 941,546 | | | 356,004 | | | 37.8 | % |
Asia | 237,053 | | | 232,574 | | | 4,479 | | | 1.9 | % |
Licensing | 96,709 | | | 73,996 | | | 22,713 | | | 30.7 | % |
Total net revenue | $ | 2,591,631 | | | $ | 1,876,529 | | | 715,102 | | | 38.1 | % |
Earnings (loss) from operations: | | | | | | | |
Americas Retail | $ | 124,902 | | | $ | (15,776) | | | 140,678 | | | (891.7 | %) |
Americas Wholesale | 53,731 | | | 19,912 | | | 33,819 | | | 169.8 | % |
Europe | 174,860 | | | 66,790 | | | 108,070 | | | 161.8 | % |
Asia | (4,114) | | | (20,758) | | | 16,644 | | | (80.2 | %) |
Licensing | 88,136 | | | 67,938 | | | 20,198 | | | 29.7 | % |
Total segment earnings from operations | 437,515 | | | 118,106 | | | 319,409 | | | 270.4 | % |
Corporate overhead | (129,588) | | | (100,962) | | | (28,626) | | | 28.4 | % |
Asset impairment charges | (3,149) | | | (80,442) | | | 77,293 | | | (96.1 | %) |
Net gains on lease modifications | 259 | | | 2,801 | | | (2,542) | | | (90.8 | %) |
Total earnings (loss) from operations | $ | 305,037 | | | $ | (60,497) | | | 365,534 | | | 604.2 | % |
Operating margins: | | | | | | | |
Americas Retail | 16.5 | % | | (3.1 | %) | | | | |
Americas Wholesale | 26.7 | % | | 16.9 | % | | | | |
Europe | 13.5 | % | | 7.1 | % | | | | |
Asia | (1.7 | %) | | (8.9 | %) | | | | |
Licensing | 91.1 | % | | 91.8 | % | | | | |
Total Company | 11.8 | % | | (3.2 | %) | | | | |
Americas Retail
Net revenue from our Americas Retail segment decreasedincreased by $46.5 million, or 4.7%, to $935.5$248.3 million for fiscal 2017, from $981.9 million in2022, compared to fiscal 2016.2021. In constant currency, net revenue decreasedincreased by 4.1%47.1% compared to the prior year. Approximately 60% of the increase was driven by temporary store closures in the prior year and 40% of the increase was driven primarily by increases in comparable store sales. Excluding the unfavorable impact from negative comparablethe temporary store sales and net store closures. Comparable store sales (including e-commerce) inclosures, the U.S. and Canada decreased 4.9% in U.S. dollars and 4.5% in constant currency, which excludes the unfavorable translation impact from currency fluctuations relating to our Canadian retail stores and e-commerce sites. E-commerce sales increased by $2.9 million, or 3.2%, to $92.4 million for fiscal 2017, compared to $89.5 million in fiscal 2016. The inclusion of our e-commerce sales improved the comparable store sale percentage by 0.8% in U.S. dollars and 0.9% in constant currency. The store base for the U.S. and Canada decreased by an average of 1123 net stores in fiscal 20172022 compared to the prior year, resulting in a 0.8%5.5% net decrease in average square footage. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites unfavorablyfavorably impacted net revenue by $6.4$7.8 million.
Operating margin decreased 430increased 19.6% for fiscal 2022, compared to fiscal 2021. Approximately 1,300 basis points to negative 2.4% for fiscal 2017,of the increase was driven by leveraging of expenses, 480 basis points from 1.9% in fiscal 2016, due to lower gross margins and a higher SG&A rate. The lower gross margins were driven primarily by more markdowns, and the negative impact on the fixed cost structure resulting270 basis points from negative comparable store sales. The higher SG&A rate was due primarily to the negative impact on the fixed cost structure resulting from negative comparable store sales.initial markups.
LossEarnings from operations from our Americas Retail segment was $22.8increased by $140.7 million for fiscal 2017,2022 compared to earningsloss from operations for fiscal 2021. Approximately 70% of $18.4 million in fiscal 2016. The deterioration reflects the impact on earningsincrease was driven by higher net revenues, 25% from negative comparable store saleslower markdowns, and lower product margins.the remaining from higher initial markups.
Americas Wholesale
Net revenue from our Americas Wholesale segment decreasedincreased by $9.3 million, or 6.0%, to $146.3$83.6 million for fiscal 2017, from $155.6 million in2022, compared to fiscal 2016.2021. In constant currency, net revenue decreasedincreased by 2.7%67.8% compared to the prior year,year. Approximately 80% of the increase was driven primarily by lower shipments in our U.S. wholesale business.business due mainly to higher demand. Additionally, Canada and Mexico wholesale each contributed approximately 10% to the overall increase. Currency translation fluctuations relating to our non-U.S. wholesale businesses unfavorablyfavorably impacted net revenue by $5.2$3.8 million.
Operating margin decreased 250 basis points to 16.5%increased 9.8% for fiscal 2017, from 19.0% in2022, compared to fiscal 2016, driven by lower gross margins2021, due primarily to leveraging of expenses and a higher SG&A rate. The lower gross margins were driven primarily by the unfavorable impact from currency exchange rate fluctuations on product costs and lower initial markups. The increase was driven by 950 basis points improvement resulting from leveraging of expenses, 110 basis points from higher SG&A rate was due primarily to overall deleveraging.initial markups, partially offset by higher freight costs.
Earnings from operations from our Americas Wholesale segment decreasedincreased by $5.4 million, or 18.2%, to $24.2$33.8 million for fiscal 2017, from $29.6 million in2022, compared to fiscal 2016. The decrease2021. Nearly the entire increase was driven primarily by the negativefavorable impact on earnings from lower product margins and lowerhigher revenue. Currency translation fluctuations relating to our non-U.S. wholesale businesses unfavorably impacted earnings from operationsApproximately 5% of the increase was driven by $1.6 million.higher initial markups, partially offset by higher freight costs.
Europe
Net revenue from our Europe segment increased by $65.3 million, or 9.0%, to $788.2$356.0 million for fiscal 2017,2022, compared to $722.9 million in fiscal 2016.2021. In constant currency, net revenue increased by 9.4%37.1% compared to the prior year,year. Approximately 60% of the increase was driven primarily by thehigher wholesale shipments, partly due to a favorable impactshift of shipments from retail expansionfiscal 2021 into fiscal 2022, 20% from temporary store closures in fiscal 2021, 10% from higher e-commerce, and a percentage increase in the high-single digits for5% from higher comparable store sales,sales. Net store development contributed a favorable 5% to the overall increase, partially offset by lower shipments in our European wholesale business. As of January 28, 2017, we directly operated 336 stores in Europe compared to 280 stores at January 30, 2016, excluding concessions, which represents a 20.0% increase over the prior year.permanent store closures. Currency translation fluctuations relating to our European operations unfavorablyfavorably impacted net revenue by $2.4$6.4 million.
Operating margin decreased 20increased 6.4% for fiscal 2022, compared to fiscal 2021. The increase was driven by a 980 basis points to 7.2% for fiscal 2017, from 7.4% in fiscal 2016,improvement due to overall leveraging of expenses, 160 basis points from lower gross margins,markdowns, and 80 basis points in occupancy costs. The increase was partially offset by a lower SG&A rate. The lower gross margins were driven primarily by the unfavorable impact260 basis points in discretionary expenses, 190 basis points from currency exchange rate fluctuations, partially offset by the favorable impacthigher freight expense, and 130 basis points from positive comparable store sales. The lower SG&A rate was driven by the favorable impact on the fixed cost structure resulting from overall leveraging of expenses.higher government subsidies received in fiscal 2021.
Earnings from operations from our Europe segment increased by $3.3 million, or 6.1%, to $57.0$108.1 million for fiscal 2017,2022, compared to $53.7 million in fiscal 2016. The2021. Approximately 140% of the increase was due to the favorable impact on earnings from
driven by higher revenue, 20% from lower markdowns, and 10% from lower occupancy expenses. This was partially offset by an unfavorable 30% impact from high discretionary expenses, 20% from higher occupancy costsfreight expense, and store selling expenses due to retail expansion.15% from government subsidies received in fiscal 2021. Currency translation fluctuations relating to our European operations unfavorably impacted earnings from operations by $1.6$6.8 million.
Asia
Net revenue from our Asia segment increased by $8.6 million, or 3.6%, to $248.6$4.5 million for fiscal 2017,2022, compared to $240.0 million in fiscal 2016.2021. In constant currency, net revenue increased by 4.9%0.5% compared to the prior year. Approximately 250% of the increase was driven by new store development, 120% from higher e-commerce, 80% from temporary closures in the prior year, and 80% from increases comparable store sales. This was partially offset by a 220% decrease driven primarily by retail expansionpermanent store closures and positive comparable stores200% decrease driven by lower wholesale shipments. Currency translation fluctuations relating to our Asian operations favorably impacted net revenue by $3.3 million.
Operating margin improved 7.2% to negative 1.7% for fiscal 2022, from negative 8.9% in China. Asfiscal 2021. Approximately 490 basis points of January 28, 2017, wethe improvement was driven by business mix and 340 basis points from nonrecurring obsolescence reserves from fiscal 2021, partially offset by 130 basis points from decrease from nonrecurring one time benefits in occupancy and government subsidies received in fiscal 2021.
Loss from operations from our partners operated 504 stores and 384 concessions in Asia segment was $4.1 million for fiscal 2022, compared to 490 storesloss of $20.8 million in fiscal 2021. Approximately 50% of the improvement was driven by business mix and 416 concessions at January 30, 2016.the remainder was mainly driven by nonrecurring obsolescence reserves. Currency translation fluctuations relating to our Asian operations unfavorably impacted net revenue by $3.1 million.
Operating margin decreased 530 basis points to negative 1.0% for fiscal 2017, from 4.3% in fiscal 2016. The decrease in operating margin was driven primarily by a higher SG&A rate and lower gross margins. The higher SG&A rate was driven primarily by higher expenses resulting from retail expansion in China and country mix. The lower gross margins were driven by higher occupancy costs due to retail expansion in China and the unfavorable impact from country mix.
Lossloss from operations from our Asia segment was $2.4 million for fiscal 2017, compared to earnings from operationsby $0.8 million.
Licensing
Net royalty revenue from our Licensing segment decreasedincreased by $12.1 million, or 14.4%, to $71.9$22.7 million for fiscal 2017, from $84.0 million2022, compared to in fiscal 2016. The decrease was driven primarily by overall softness in our licensing business, particularly in our watch and footwear categories.
2021. Earnings from operations from our Licensing segment decreasedincreased by $11.8 million, or 12.8%, to $80.4$20.2 million for fiscal 2017,2022, from $92.2 million in fiscal 2016.2021. The decreaseincrease was driven primarily by the unfavorablefavorable impact to earnings from lowerhigher revenue.
Corporate Overhead
Unallocated corporate overhead decreasedincreased by $9.0 million to $73.9$28.6 million for fiscal 2017,2022, compared to $82.9 million in fiscal 2016. The decrease2021. Approximately 65% of the increase was driven primarily by lower performance-based compensation costs duringand the remaining from higher overall discretionary expenses.
Fiscal 2021 Compared to Fiscal 2020
The comparison of fiscal 2017 and charges related2021 to legal matters of $7.0 million during fiscal 2016.2020 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for fiscal 2021, filed with the SEC on April 9, 2021.
Non-GAAP Measures
The Company’sOur reported financial results are presented in accordance with GAAP. The reported net loss attributable to Guess?, Inc. and diluted loss per share in fiscal 2018 reflect the impact of (i) net losses on a lease termination, (ii) asset impairment charges, (iii) the tax effects of these adjustments and (iv) additional income tax expense related to the enactment of the Tax Reform. The reported net earnings (loss) attributable to Guess?, Inc. and diluted earnings (loss) per share in fiscal 20172022 and fiscal 2021 reflect the impact of (i)certain professional service and legal fees and related (credits) costs, certain separation charges, asset impairment charges, net gains on lease terminations, (ii) asset impairment charges, (iii) restructuring charges and amodifications, non-cash amortization of debt discount on our convertible senior notes, the related estimated exitincome tax charge, (iv) a gain related to the sale of a minority interest investment, (v) the tax effectsimpacts of these adjustments and (vi) a valuation allowance established onas well as certain deferreddiscrete income tax assets. The reported net earnings attributable to Guess?, Inc. and diluted earnings per share in fiscal 2016 reflectadjustments, where applicable. Fiscal 2021 also includes the impact of (i)from changes in the income tax law on deferred income taxes in certain tax jurisdictions, net gains on lease terminations, (ii) asset impairment chargesincome tax settlements and (iii) theadjustments to specific uncertain income tax effects of these adjustments. positions.
These items affect the comparability of the Company’sour reported results. The financial results are also presented on a non-GAAP basis, as defined in Section 10(e) of Regulation S-K of the SEC, to exclude the effect of these items. The Company believesWe believe that these “non-GAAP” or “adjusted” financial measures are useful for investors to evaluate the comparability of the Company’sour operating results and itsour future outlook when reviewed in conjunction with the Company’sour GAAP financial statements. The non-GAAP measures are provided in addition to, and not as alternatives for, the Company’s
A reconciliation of reported GAAP results.results to comparable non-GAAP results follows (in thousands, except per share data):
The adjusted measures for fiscal 2018 exclude the impact | | | | | | | | | | | |
| Fiscal 2022 | | Fiscal 2021 |
Reported GAAP net earnings (loss) attributable to Guess?, Inc. | $ | 171,363 | | | $ | (81,229) | |
Certain professional service and legal fees and related (credits) costs1 | 2,652 | | | (565) | |
Separation charges2 | — | | | 3,413 | |
Asset impairment charges3 | 3,149 | | | 80,442 | |
Net gains on lease modifications4 | (259) | | | (2,801) | |
Amortization of debt discount5 | 11,125 | | | 10,394 | |
Discrete income tax adjustments6 | 10,630 | | | 4,053 | |
Income tax impact from adjustments7 | (3,973) | | | (18,228) | |
Total adjustments affecting net earnings (loss) attributable to Guess?, Inc. | 23,324 | | | 76,708 | |
Adjusted net earnings (loss) attributable to Guess?, Inc. | $ | 194,687 | | | $ | (4,521) | |
| | | |
Net earnings (loss) per common share attributable to common stockholders: |
GAAP diluted | $ | 2.57 | | | $ | (1.27) | |
Adjusted diluted | $ | 2.92 | | | $ | (0.07) | |
Notes:
1 Amounts recorded represent certain professional service and legal fees and related (credits) costs, which we otherwise would not have incurred as part of net losses on lease terminations of $11.4 million, asset impairmentour business operations.
2 Amounts represent certain separation-related charges of $8.5 million and additional income tax expense of $47.9 million relateddue to headcount reduction in response to the enactment of the Tax Reform. The net losses on lease terminations related primarilypandemic and due to the modificationseparation of certain lease agreements
our former Chief Executive Officer.
held with a common landlord in North America. The3 Amounts represent asset impairment charges related primarily to the impairment of operating lease right-of-use assets and property and equipment related to certain retail locations in North America resulting from under-performancelower revenue and future cash flow projections from the effects of the COVID-19 pandemic and expected store closures. The additional income tax expense related to the enactment of the Tax Reform is comprised of a provisional charge of $24.9 million for the re-measurement of U.S. deferred tax assets and a provisional charge of $23.0 million for the estimated effects of the transitional tax on the deemed repatriation of foreign earnings. These items resulted in a combined $66.3 million impact ( after considering the related tax benefit of $1.4 million resulting from the net losses on lease terminations and asset impairment charges), or an unfavorable $0.81 per share impact during fiscal 2018. Net loss attributable to Guess?, Inc. was $7.9 million and diluted loss per common share was $0.11 for fiscal 2018. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were $58.4 million and adjusted diluted earnings per common share were $0.70 for fiscal 2018.
The adjusted measures for fiscal 2017 exclude the impact of asset impairment charges of $34.4 million, restructuring charges of $6.1 million, a restructuring related estimated exit tax charge of $1.9 million and a valuation allowance established on certain deferred tax assets of $6.8 million, partially offset by a gain related to the sale of a minority interest investment of $22.3 million and4 Amounts recorded represent net gains on lease terminations of $0.7 million. The asset impairment charges related primarily to the impairment of certain retail locations in North America resulting from under-performance and expected store closures. During the first quarter of fiscal 2017, the Company implemented a global cost reduction and restructuring plan to better align its global cost and organizational structure with its current strategic initiatives. This plan included the consolidation and streamlining of the Company’s business processes and a reduction in its global workforce and other expenses. During fiscal 2017, the Company recorded a valuation allowance on certain deferred tax assets, a portion of which was generated from asset impairment charges recorded during fiscal 2017. The net gains on lease terminationsmodifications related primarily to the early termination of certain lease agreements in Europe. These items resultedagreements.
5 In April 2019, we issued the Notes in a combined $16.0 million impact (after consideringprivate offering. We have separated the Notes into liability (debt) and equity (conversion option) components. The debt discount, which represents an amount equal to the fair value of the equity component, is amortized as non-cash interest expense over the term of the Notes.
6 Amounts represent discrete income tax adjustments related primarily to the impacts from an intra-entity transfer of intellectual property rights to a wholly-owned Swiss subsidiary during the quarter ended October 30, 2021, impacts from cumulative valuation allowances and the income tax benefits from an income tax rate change due to net $10.2 millionoperating loss carrybacks.
7 The income tax benefit resulting from theeffect of certain professional service and legal fees and related (credits) costs, separation charges, asset impairment charges, restructuring charges, the sale of the minority interest investment and net gains on lease terminations), or an unfavorable $0.19 per share impact during fiscal 2017. Net earnings attributable to Guess?, Inc. were $22.8 millionmodifications and diluted earnings per common share were $0.27 for fiscal 2017. Excludingthe amortization of debt discount was based on our assessment of deductibility using the statutory income tax rate (inclusive of the impact of these items, adjusted net earnings attributable to Guess?, Inc.valuation allowances) of the tax jurisdiction in which the charges were $38.8 million and adjusted diluted earnings per common share were $0.46 for fiscal 2017.
The adjusted measures for fiscal 2016 exclude the impact of asset impairment charges of $2.3 million which was mostly offset by net gains on lease terminations of $2.3 million, resulting in a minimal per share impact. The asset impairment charges related primarily to the impairment of certain retail locations in North America resulting from under-performance and expected store closures. The net gains on lease terminations related primarily to the early termination of certain lease agreements in Europe.incurred.
Our discussion and analysis herein also includesinclude certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating the Company’sour foreign revenue, expenses and balance sheet amounts into U.S. dollars. These rate fluctuations can have a significant effect on reported operating results under GAAP. The Company providesWe provide constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate net revenue, comparable store sales and earnings (loss) from operations on a constant currency basis, operating results for the current-year period are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year. To calculate balance sheet amounts on a constant currency basis, the current year balance sheet amount is translated into U.S. dollars at the exchange rate in effect at the comparable prior-year period.period end. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information presented may not be comparable to similarly titled measures reported by other companies.
In calculating the estimated impact of currency fluctuations (including translational and transactional impacts) on other measures such as earnings (loss) per share, the Company estimateswe estimate gross margin (including the impact of foreign exchange currency contracts designated as cash flow hedges for anticipated merchandise purchases) and expenses using the appropriate prior-year rates, translates the estimated foreign earnings (loss) at the comparable prior-year rates and excludes the year-over-year earnings impact of gains or losses arising from balance sheet remeasurement and foreign exchange currency contracts not designated as cash flow hedges for merchandise purchases.
Liquidity and Capital Resources
We need liquidity globally primarily to fund our working capital, occupancy costs, the expansion,interest payments on our debt, remodeling and rationalization of our retail stores, shop-in-shop programs, concessions, systems, infrastructure, compensation expenses, other existing operations, expansion plans, international growth and potential acquisitions and investments. In addition,If we experience a sustained decrease in consumer demand related to the U.S.COVID-19 pandemic, we need liquiditymay require access to fund share repurchases and payment of dividendsadditional credit, which may not be available to our stockholders.us on commercially acceptable terms, or at all. Generally, our working capital needs are highest during the late summer and fall as our inventories increase before the holiday selling period. In addition, in the U.S., we need liquidity to fund share repurchases, including our 2022 ASR Contract, and payment of dividends to our stockholders.
During the fiscal year ended February 3, 2018, the Company2022, we relied primarily on trade credit, available cash, real estate and other operating leases, capitalfinance leases, proceeds from short-term lines ofour credit facilities and term loans and internally generated funds to finance our operations, payment of dividends, share repurchases and expansion. The Company anticipates thatoperations. We anticipate we will be able to satisfy our ongoing cash requirements during the next twelve12 months for working capital, capital expenditures, payments on our debt, capitalfinance leases and operating leases, as well as lease terminationmodification payments, potential acquisitions and investments, expected income tax payments, and share repurchases and dividend payments to stockholders, primarily with cash flow from operations and existing cash balances as supplemented by borrowings under our existing Credit FacilityFacilities and proceeds from our term loans, as needed. (Such arrangements are described further in “Part IV. Financial Statements – Note 8 – Borrowings and Finance Lease Obligations” in this Form 10-K.) Due to the seasonality of our business and cash needs, we may increase borrowings under our established credit facilities or enter new credit facilities from time-to-time, during
the next 12 months and beyond. We are currently considering entering into a long-term revolving credit agreement through our European subsidiary. This agreement, if executed, would replace the existing credit facilities in our European subsidiary.
We expect to settle the principal amount of our outstanding Notes in 2024 in cash and any excess in shares. Our outstanding Notes may be converted at the option of the holders as described in “Part IV. Financial Statements – Note 10 – Convertible Senior Notes and Related Transactions.” As of January 29, 2022, none of the conditions allowing holders of the convertible notes to convert had been met. Pursuant to one of these conditions, if our stock trading price exceeds 130% of the initial conversion price of the convertible notes of $25.78 for at least 20 trading days during the 30 consecutive trading-day period ending on, and including, the last trading day of any calendar quarter, holders of the convertible notes would have the right to convert their convertible notes during the next calendar quarter.
In connection with the increase to the quarterly cash dividend, we will adjust the conversion price (which is expected to decrease) of the Notes in accordance with the terms of the indenture governing the Notes. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the U.S.manner and Canadasubject to the terms and conditions provided in the indenture governing the Notes. The convertible note hedge transaction we entered into in connection with our issuance of the Notes is expected generally to reduce the potential dilution upon conversion of the convertible notes and/or offset any cash payments we are required to make in excess of the principal amount of convertible notes that are converted, as well as bank facilitiesthe case may be. (Such arrangements are described further in Europe, as described below under “—Borrowings“Part IV. Financial Statements – Note 10 – Convertible Senior Notes and Capital Lease Obligations.”Related Transactions” in this Form 10-K.)
In December 2017,On March 27, 2020, the U.S. government enacted the Tax ReformCARES Act to provide economic relief from the COVID-19 pandemic. Among other provisions, the CARES Act allows for a full offset of taxable income in a five-year carryback period for net operating losses, which significantly changes the U.S. corporatewill reduce current period income tax laws, including moving fromexpense and may result in a global taxation regime to a territorial regime and loweringrefund of previously paid income tax amounts at higher historical income tax rates. For the future U.S. federal tax rate from 35% to 21%. The Company is now required to payyear ended January 30, 2021, we recognized a tax on all historicalbenefit of $0.9 million related to the CARES Act.
We have a balance related to the 2017 Tax Cuts and Jobs Act (the “Tax Reform”) transition tax included in other long-term liabilities of $19.9 million (excluding related interest) as of January 29, 2022 and January 30, 2021. Refer to “Part IV. Financial Statements – Note 12 – Income Taxes” for further detail.
We have historically considered the undistributed earnings of our foreign subsidiaries that have not been repatriated to the U.S., and as a result, the Company has recorded a provisional charge of $23.0 million during the fourth quarter of fiscal 2018. Such charges are expected to be paid over an eight year period as the Tax Reform allows beginning in calendar 2018. The Company has provided for any additional tax liabilities on amounts that are estimated to be repatriated from foreign operations asindefinitely reinvested. As a result of the Tax Reform.Reform, we had a substantial amount of previously taxed earnings that could be distributed to the U.S. without additional U.S. taxation. We have not providedcontinue to evaluate our plans for otherreinvestment or repatriation of unremitted foreign earnings and regularly review our cash positions and determination of permanent reinvestment of foreign earnings. If we determine that all or a portion of such foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes and U.S. state income taxes, on undistributedbeyond the one-time transition tax. As of January 29, 2022, we determined that approximately $7.4 million of such foreign earnings expectedare no longer indefinitely reinvested. The incremental income tax cost to be reinvested outsiderepatriate these earnings to the U.S. If inis immaterial. We intend to indefinitely reinvest the future we decideremaining earnings from our foreign subsidiaries for which a deferred income tax liability has not already been recorded. It is not practicable to repatriate suchestimate the amount of income tax that might be payable if these earnings we would incur other incremental taxes. Our current plans do not indicate a needwere repatriated due to repatriate them to fund our U.S. cash requirements.the complexities associated with the hypothetical calculation. As of February 3, 2018, the CompanyJanuary 29, 2022, we had cash and cash equivalents of $367.4$415.6 million,, of which approximately $76.9$178.2 million was held in the U.S.
Excess cash and cash equivalents, which represent the majority of our outstanding cash and cash equivalents balance, are held primarily in overnight deposit and short-term time deposit accounts. Please see and money market accounts. Refer to “Part I, Item 1A. Risk Factors” for a discussion of risk factors which could reasonably be likely to result in a decrease of internally generated funds available to finance capital expenditures and working capital requirements.
The Company has presented belowCOVID-19 Impact on Liquidity
Refer to the cash flow performance comparison“—COVID-19 Business Update” section and in “Part IV. Financial Statements – Note 1 – Description of the year ended February 3, 2018 versusBusiness and Summary of Significant Accounting Policies and Practices” for a discussion of the year ended January 28, 2017. Asimpact from the COVID-19 pandemic on our financial performance and our liquidity.
In light of store closures and reduced traffic in stores, we took certain actions with respect to certain of our existing leases, including engaging with landlords to discuss rent deferrals, as well as other rent concessions. Throughout the COVID-19 pandemic, we suspended rental payments and/or paid reduced rental amounts with respect to our retail stores that were closed or experiencing drastically reduced customer traffic as a result of the adoptionCOVID-19 pandemic. During fiscal 2022 and fiscal 2021, we successfully negotiated with several landlords, including some of new authoritative guidance during fiscal 2018, which impacted the classification of certain cash receiptsour larger landlords, and cash payments in the statement of cash flows, the amounts related to cash flows from operating, investing and financing activitieshave received rent abatement benefits, as well as new lease terms for some of our affected leases. We continue to engage in discussions with additional affected landlords in an effort to achieve appropriate rent relief and other lease concessions and, in some cases, to terminate existing leases. In a few instances, where negotiations with landlords have proven unsuccessful, we are engaged in litigation related to rent obligations both during the effectCOVID-19 pandemic and through the term of exchange rates on cash, cash equivalents and restricted cash have been updated for fiscal 2017the lease.
Fiscal 2022 Compared to conform to the current period presentation. Refer to Note 2 to the Consolidated Financial Statements for further description of these changes.Fiscal 2021
Operating Activities
Net cash provided by operating activities was $148.4 million for the fiscal year ended February 3, 2018, compared to $71.7$131.6 million for the fiscal year ended January 28, 2017,29, 2022, compared to $209.1 million for the fiscal year ended January 30, 2021, or an increasea decrease of $76.6$77.4 million. The increasedeterioration was driven primarily by the favorable impact ofunfavorable changes in working capital during fiscal 2018 compared to the prior year.and higher income tax payments, partially offset by higher cash flows generated from net earnings. The changeunfavorable changes in working capital waswere due primarily to higher inventory as we placed orders earlier in order to mitigate some of the supply chain disruptions and higher accounts receivable driven primarily by the favorable impacthigher wholesale shipments. Cash flows generated from timing of payments and improved inventory management during fiscal 2018 compared to the prior year. Net cash providednet earnings were negatively impacted by operating activities for fiscal 2018 includes the impact from up-front payments of approximately $22$107.2 million U.S. income tax payment related to the modificationintra-entity transfer of certain lease agreements held with a common landlord in North America.intellectual property rights transaction during fiscal 2022.
Investing Activities
Net cash used in investing activities was $90.3 million for the fiscal year ended February 3, 2018, compared to $49.0$62.3 million for the fiscal year ended January 28, 2017.29, 2022, compared to $22.2 million for the fiscal year ended January 30, 2021. Net cash used in investing activities related primarily to capital expenditures incurred on international retail expansion, investments in technology and other infrastructure and, to a lesser extent, existing store remodeling programs. In addition, the cost of any business acquisitions, settlement of forward exchange currency contracts, purchases of investmentsremodel programs and proceeds from the disposition of long-term assets are also included in cash flows used in investing activities.
international retail expansion.
The increase in cash used in investing activities was driven primarily by proceeds receivedhigher retail remodel and international expansion costs and higher strategic investments in the prior year from the sale of long-term assets.technology during fiscal 2022 compared to fiscal 2021. During the fiscal year ended February 3, 2018, the CompanyJanuary 29, 2022, we opened 12987 directly operated stores compared to 13022 directly operated stores that were opened in the prior year.
Financing Activities
Net cash used in financing activities was $128.7$97.0 million for the fiscal year ended February 3, 2018,January 29, 2022, compared to $69.0$9.9 million for the fiscal year ended January 28, 2017. Cash30, 2021. Net cash used in financing activities related primarily to the payment of dividends and the repurchases of shares of the Company’s common stock. In addition, payments related to borrowings, capital lease obligations, capital distributions to noncontrolling interests, issuance ofin our common stock under our equity plans, purchase of redeemable noncontrolling interest and debt issuance costs and proceeds fromplan, repayments on borrowings and capital contributions from noncontrolling interests are also includedfinance lease obligations and payment of dividends.
The increase in cash flows used in financing activities.
The increase in net cash used in financing activities was duedriven primarily due toby lower proceeds received from borrowings, higher payment of dividends and higher share repurchases, partially offset by lower repayments of shares of the Company’s common stockborrowings and prior-year proceeds from the Company’s ten-year $21.5 million real estate secured loan entered intofinance lease obligations during fiscal 2017. During fiscal 2018,2022 compared to the Company invested $56.1 million to repurchase 3,866,387 of its common shares, of which $6.0 million was settled subsequent to year end. During fiscal 2017, the Company invested $3.5 million to repurchase 289,968 of its common shares.prior year.
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash
During the fiscal year ended February 3, 2018,January 29, 2022, changes in foreign currency translation rates increaseddecreased our reported cash, cash equivalents and restricted cash balance by $40.7 million.$26.1 million. This compares to a decreasean increase of $2.1$7.5 million in cash, cash equivalents and restricted cash driven by changes in foreign currency translation rates during the fiscal year ended January 28, 2017.30, 2021.
Working Capital
As of February 3, 2018, the CompanyJanuary 29, 2022, we had net working capital (including cash and cash equivalents) of $640.9$466.2 million, compared to $698.6$470.0 million at January 28, 2017. The Company’s30, 2021.
Our primary working capital needs are for the current portion of lease liabilities, accounts receivable and inventory. Accounts receivable increased by $34.5 million, or 15.3%, to $260.0 million as of February 3, 2018, compared to $225.5 million at January 28, 2017. The accounts receivable balance consists of trade receivables relating primarily to the Company’sour wholesale
business in Europe and, to a lesser extent, to itsour wholesale businesses in Asiathe Americas and the Americas,Asia, royalty receivables relating to itsour licensing operations, credit card and retail concession receivables related to itsour retail businesses and certain other receivables. Accounts receivable increased by $14.7 million, or 4.7%, to $328.9 million as of January 29, 2022, compared to $314.1 million at January 30, 2021. On a constant currency basis, accounts receivable increased by $4.7$40.7 million, or 2.1%12.9%, when compared to January 28, 2017.30, 2021. As of February 3, 2018,January 29, 2022, approximately 59%50% of our total net trade receivables and 72%64% of our European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. Our credit insurance coverage contains certain terms and conditions specifying deductibles and annual claim limits. Inventory increased by $60.9$73.2 million, or 16.6%18.8%, to $428.3$462.3 million as of February 3, 2018,January 29, 2022, from $367.4$389.1 million at January 28, 2017.30, 2021. On a constant currency basis, inventory increased by $21.1$99.7 million, or 5.8%25.6%, when compared to January 28, 2017,30, 2021, driven primarily by retail expansion in our international markets, partially offset by lower inventory in Americas Retail.management initiatives to mitigate supply chain disruptions, including accelerating product orders.
.
Material Cash Requirements
Contractual Obligations and Commitments
The following table summarizes the Company’sour material cash requirements for known contractual and other obligations as of February 3, 2018January 29, 2022 and the effects such obligations are expected to have on liquidity and cash flow in future periods (dollars(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due by period |
| Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Contractual Obligations: | | | | | | | | | |
Short-term borrowings | $ | 12,201 | | | $ | 12,201 | | | $ | — | | | $ | — | | | $ | — | |
Convertible senior notes, net1,2 | 315,000 | | | 6,000 | | | 309,000 | | | — | | | — | |
Long-term debt, excluding convertible senior notes, net1 | 71,408 | | | 26,186 | | | 26,330 | | | 18,892 | | | — | |
Finance lease obligations1 | 25,611 | | | 6,872 | | | 11,607 | | | 6,444 | | | 688 | |
Operating lease obligations3 | 856,246 | | | 218,407 | | | 292,639 | | | 167,878 | | | 177,322 | |
Purchase obligations4 | 258,612 | | | 258,612 | | | — | | | — | | | — | |
Benefit obligations5 | 81,765 | | | 2,882 | | | 5,444 | | | 8,428 | | | 65,011 | |
Total | $ | 1,620,843 | | | $ | 531,160 | | | $ | 645,020 | | | $ | 201,642 | | | $ | 243,021 | |
| | | | | | | | | |
Other commercial commitments6 | $ | 10,063 | | | $ | 3,600 | | | $ | 3,136 | | | $ | 3,327 | | | $ | — | |
1Includes interest payments.
2In April 2019, we issued the Notes in thousands):a private offering. Refer to “Part IV. Financial Statements – Note 10 – Convertible Senior Notes and Related Transactions” for further detail.
3We have elected the practical expedient to not separate non-lease components from lease components in the measurement of liabilities for our directly-operated real estate leases. As such, this amount reflects operating lease costs that are considered in the measurement of the related operating lease liabilities, which may include fixed payments related to rent, insurance, property taxes, sales promotion, common area maintenance and certain utility charges, where applicable. This does not include variable lease costs that are excluded from the measurement of the operating lease liabilities, such as those charges that are based on a percentage of annual sales volume or estimates. In fiscal 2022, these variable charges totaled $77.5 million. Refer to “Part IV. Financial Statements – Note 9 – Lease Accounting” for further detail. |
| | | | | | | | | | | | | | | | | | | |
| Payments due by period |
| Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Contractual Obligations: | | | | | | | | | |
Long-term debt (1) | $ | 28,216 |
| | $ | 2,114 |
| | $ | 4,876 |
| | $ | 2,457 |
| | $ | 18,769 |
|
Capital lease obligations (1) | 24,984 |
| | 2,940 |
| | 5,879 |
| | 5,306 |
| | 10,859 |
|
Operating lease obligations (2) | 984,902 |
| | 201,078 |
| | 329,220 |
| | 224,724 |
| | 229,880 |
|
Purchase obligations (3) | 208,143 |
| | 208,143 |
| | — |
| | — |
| | — |
|
Benefit obligations (4) | 94,723 |
| | 1,863 |
| | 9,102 |
| | 10,166 |
| | 73,592 |
|
Total | $ | 1,340,968 |
| | $ | 416,138 |
| | $ | 349,077 |
| | $ | 242,653 |
| | $ | 333,100 |
|
Other commercial commitments (5) | $ | 990 |
| | $ | 990 |
| | $ | — |
| | $ | — |
| | $ | — |
|
4Purchase obligations represent open purchase orders for raw materials and merchandise at the end of the fiscal year. These purchase orders can be impacted by various factors, including the scheduling of market weeks, the timing of issuing orders, the timing of the shipment of orders and currency fluctuations. | |
(1) | Includes interest payments. |
| |
(2) | 5Includes expected payments associated with the deferred compensation plan and the Supplemental Executive Retirement Plan through fiscal 2055. 6Consists of standby letters of credit for rent guarantees, workers’ compensation and general liability insurance. Does not include rent based on a percentage of annual sales volume, insurance, taxes and common area maintenance charges. In fiscal 2018, these variable charges totaled $133.2 million.
|
| |
(3) | Purchase obligations represent open purchase orders for raw materials and merchandise at the end of the fiscal year. These purchase orders can be impacted by various factors, including the scheduling of market weeks, the timing of issuing orders, the timing of the shipment of orders and currency fluctuations. |
| |
(4) | Includes expected payments associated with the deferred compensation plan and the Supplemental Executive Retirement Plan through fiscal 2055. |
| |
(5) | Consists of standby letters of credit for workers’ compensation and general liability insurance. |
Excluded from the above contractual obligations table is the noncurrent liability for unrecognized tax benefits, including penalties and interest, of $19.0 million.$57.5 million. This liability for unrecognized tax benefits has been excluded because the Companywe cannot make a reliable estimate of the period in which the liability will be settled, if ever.
The above table also excludes current liabilities (other than short-term borrowings) as these amounts will be paid within one year and certain long-term liabilities that do not require cash payments.
Off-Balance Sheet Arrangements
Other than certain obligations and commitments included in the table above, we did not have any material off-balance sheet arrangements as of February 3, 2018.January 29, 2022.
Capital Expenditures
Gross capital expenditures totaled $63.5 million, before deducting lease incentives of $3.1 million, for the fiscal year ended January 29, 2022. This compares to gross capital expenditures of $18.9 million, before deducting lease incentives of $2.3 million, for the fiscal year ended January 30, 2021.
We will periodically evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives.
Dividends
During the first quarter of fiscal 2008, the Company announced the initiation of a quarterly cash dividend of $0.06 per share of the Company’s common stock. Since that time, the Company has continued to pay a quarterly cash dividend, which has subsequently increased to $0.225 per common share.
On March 21, 2018, the Company16, 2022, we announced a regular quarterly cash dividend of $0.225$0.225 per share on the Company’sour common stock. The cash dividend will be paid on April 20, 201815, 2022 to shareholders of record as of the close of business on April 4, 2018.March 30, 2022. On November 23, 2021, we announced an increase to our regular quarterly cash dividend from $0.1125 to $0.225 per share on our common stock. In connection with the increase to the quarterly cash dividend, we will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to decrease) of the Notes in accordance with the terms of the indenture governing the Notes. Refer to “Part IV. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions” in this Form 10-K for disclosures about the Notes.
The payment of cash dividendsDecisions on whether, when and in thewhat amounts to continue making any future dividend distributions will beremain at all times entirely at the discretion of our Board of Directors, which reserves the right to change or terminate our dividend practices at any time and for any reason without prior notice. The payment of cash dividends in the future will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions and U.S. and global liquidity.
Share Repurchases
On June 26, 2012, the Company’sAugust 23, 2021, our Board of Directors terminated the previously authorized 2012 share repurchase program (which had $47.8 million capacity remaining) and authorized a new program (the “2021 Share Repurchase Program”) to repurchase, from time-to-time and as market and business conditions warrant, up to $500$200 million of the Company’sour common stock. As of January 29, 2022, we had remaining authority under the 2021 Share Repurchase Program to purchase $149.0 million of our common stock. On March 14, 2022, the Board of Directors expanded its repurchase authorization by $100 million, leaving a new capacity of $249.0 million.
Repurchases under the program may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under
the program, which may be discontinued at any time, without prior notice. During fiscal 2018, the Company2022, we repurchased 3,866,3872,289,292 shares under the program at an aggregate cost of $56.1 million, of which $6.0 million was settled subsequent to year end.$51.0 million. During fiscal 2017, the Company2021, we repurchased 289,9684,000,000 shares under the previous program at an aggregate cost of $3.5$38.8 million. During fiscal 2016, the Company2020, we repurchased 2,000,00016,739,740 shares at an aggregate cost of $44.0 million. As$288.1 million, which is inclusive of February 3, 2018, the Company had remaining authorityshares repurchased under the programApril 26, 2019 ASR Contract.
On March 18, 2022, pursuant to purchase $392.2existing stock repurchase authorizations, we entered into the 2022 ASR Contract to repurchase an aggregate of $175.0 million of itsour common stock.
Refer to “Part IV. Financial Statements – Note 24 – Subsequent to year end, the Company repurchased approximately 1.1 million shares under its share repurchase program at an aggregate cost of $17.6 million.
Capital Expenditures
Gross capital expenditures totaled $84.7 million, before deducting lease incentives of $7.4 million, for the fiscal year ended February 3, 2018. This compares to gross capital expenditures of $90.6 million, before deducting lease incentives of $6.1 million, for the fiscal year ended January 28, 2017.
The Company’s investmentsEvents” in capital for the full fiscal year 2019 are planned between $85 million and $95 million. The planned investments in capital are primarily related to retail and e-commerce expansion in Europe and Asia as well as continued investments in technology to support our long-term growth plans.
We will periodically evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives.this Form 10-K.
Borrowings and CapitalFinance Lease Obligations
Credit Facilities
On June 23, 2015, the Company entered into a five-year senior secured asset-based revolving credit facility with Bank of America, N.A.Refer to “Part IV. Financial Statements – Note 8 – Borrowings and the other lenders party thereto (the “Credit Facility”). The Credit Facility providesFinance Lease Obligations” in this Form 10-K for a borrowing capacity in an amount up to $150 million, including a Canadian sub-facility up to $50 million, subject to a borrowing base. Based on applicable accounts receivable, inventory, eligible cash balances and relevant covenant restrictions as of February 3, 2018, the Company could have borrowed up to $87 million under the Credit Facility. The Credit Facility has an option to expand the borrowing capacity by up to $150 million subject to certain terms and conditions, including the willingness of existing or new lenders to assume such increased amount. The Credit Facility is available for directdisclosures about our borrowings and the issuance of letters of credit, subject to certain letters of credit sublimits, and may be used for working capital and other general corporate purposes.
All obligations under the Credit Facility are unconditionally guaranteed by the Company and the Company’s existing and future domestic and Canadian subsidiaries, subject to certain exceptions, and are secured by a first priority lien on substantially all of the assets of the Company and such domestic and Canadian subsidiaries, as applicable.
Direct borrowings under the Credit Facility made by the Company and its domestic subsidiaries shall bear interest at the U.S. base rate plus an applicable margin (varying from 0.25% to 0.75%) or at LIBOR plus an applicable margin (varying from 1.25% to 1.75%). The U.S. base rate is based on the greater of (i) the U.S. prime rate, (ii) the federal funds rate, plus 0.5%, and (iii) LIBOR for a 30 day interest period, plus 1.0%. Direct borrowings under the Credit Facility made by the Company’s Canadian subsidiaries shall bear interest at the Canadian prime rate plus an applicable margin (varying from 0.25% to 0.75%) or at the Canadian BA rate plus an applicable margin (varying from 1.25% to 1.75%). The Canadian prime rate is based on the greater of (i) the Canadian prime rate, (ii) the Bank of Canada overnight rate, plus 0.5%, and (iii) the Canadian BA rate for a one month interest period, plus 1.0%. The applicable margins are calculated quarterly and vary based on the average daily availability of the aggregate borrowing base. The Company is also obligated to pay certain commitment, letter of credit and other fees customary for a credit facility of this size and type. As of February 3, 2018, the Company had $1.0 million in outstanding standby letters of credit, no outstanding documentary letters of credit and no outstanding borrowings under the Credit Facility.
The Credit Facility requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if a default or an event of default occurs under the Credit Facility or generally if borrowings exceed 80% of the borrowing base. In addition, the Credit Facility contains customary covenants, including covenants that limit or restrict the Company and certain of its subsidiaries’ ability to: incur liens, incur indebtedness, make
finance lease obligations.
investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. Upon the occurrence of an event of default under the Credit Facility, the lenders may cease making loans, terminate the Credit Facility and declare all amounts outstanding to be immediately due and payable. The Credit Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults. The Credit Facility allows for both secured and unsecured borrowings outside of the Credit Facility up to specified amounts.
The Company, through its European subsidiaries, maintains short-term uncommitted borrowing agreements, primarily for working capital purposes, with various banks in Europe. The majority of the borrowings under these agreements are secured by specific accounts receivable balances. Based on the applicable accounts receivable balances as of February 3, 2018, the Company could have borrowed up to $87.5 million under these agreements. As of February 3, 2018, the Company had no outstanding borrowings or outstanding documentary letters of credit under these agreements. The agreements are denominated primarily in euros and provide for annual interest rates ranging from 0.5% to 4.6%. The maturities of any short-term borrowings under these arrangements are generally linked to the credit terms of the underlying accounts receivable that secure the borrowings. With the exception of one facility for up to $43.6 million that has a minimum net equity requirement, there are no other financial ratio covenants.
Mortgage Debt
On February 16, 2016, the Company entered into a ten-year $21.5 million real estate secured loan (the “Mortgage Debt”). The Mortgage Debt is secured by the Company’s U.S. distribution center based in Louisville, Kentucky and provides for monthly principal and interest payments based on a 25-year amortization schedule, with the remaining principal balance and any accrued and unpaid interest due at maturity. Outstanding principal balances under the Mortgage Debt bear interest at the one-month LIBOR rate plus 1.5%. As of February 3, 2018, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $20.3 million. At January 28, 2017, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $20.9 million.
The Mortgage Debt requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if consolidated cash, cash equivalents and short term investment balances fall below certain levels. In addition, the Mortgage Debt contains customary covenants, including covenants that limit or restrict the Company’s ability to incur liens on the mortgaged property and enter into certain contractual obligations. Upon the occurrence of an event of default under the Mortgage Debt, the lender may terminate the Mortgage Debt and declare all amounts outstanding to be immediately due and payable. The Mortgage Debt specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
On February 16, 2016, the Company also entered into a separate interest rate swap agreement, designated as a cash flow hedge, that resulted in a swap fixed rate of approximately 3.06%. This interest rate swap agreement matures in January 2026 and converts the nature of the Mortgage Debt from LIBOR floating-rate debt to fixed-rate debt. The fair value of the interest rate swap asset as of February 3, 2018 and January 28, 2017 was approximately $1.5 million and $0.9 million, respectively.
Capital Lease Obligations
During fiscal 2018, the Company began the relocation of its European distribution center to the Netherlands. As a result, the Company entered into a capital lease of $17.0 million for equipment used in the new facility. The capital lease primarily provides for monthly minimum lease payments through May 2027 with an effective interest rate of approximately 6%. As of February 3, 2018, the capital lease obligation was $17.3 million.
During fiscal 2018, the Company also entered into a capital lease for $1.5 million related primarily to computer hardware and software. As of February 3, 2018, this capital lease obligation was $1.3 million.
Other
From time-to-time, the Company will obtain other financing in foreign countries for working capital to finance its local operations.
Supplemental Executive Retirement Plan
On August 23, 2005, theour Board of Directors of the Company adopted a Supplemental Executive Retirement Plan (“SERP”) which became effective January 1, 2006. The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment, death, disability or a change in control of the Company,us, in certain prescribed circumstances.
As a non-qualified pension plan, no dedicated funding of the SERP is required; however, the Company haswe have made periodic payments into insurance policies held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP. The amount of any future payments into the insurance policies, if any, may vary depending on investment performance of the trust. The cash surrender values of the insurance policies were $64.5$70.9 million and $58.6$72.1 million as of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, respectively, and were included in other assets in the Company’sour consolidated balance sheets. As a result of changes in the value of the insurance policy investments, the Companywe recorded unrealized gains (losses)of $7.7$0.6 million, $6.9$6.1 million and $(1.8) million in other income and expense during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The Company also recorded realized gains of $0.7$7.6 million in other income resulting from payout on the insurance policies(expense) during fiscal 2016.2022, fiscal 2021 and fiscal 2020, respectively. The projected benefit obligation was $54.8$49.4 million and $53.5$52.3 million as of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, respectively, and was included in accrued expenses and other long-term liabilities in the Company’sour consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of $1.9 million and $1.7 million were made during both fiscal 20182022 and fiscal 2017.2021, respectively.
Employee Stock Purchase Plan
The Company’sOur qualified employee stock purchase plan (“ESPP”) allows qualified employees (as defined) to participate in the purchase of designated shares of the Company’sour common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period. The Company has We have 4,000,000 shares of common stock registered under the ESPP.The Company’s ESPP will remain in effect through March 11, 2022. During the year ended February 3, 2018, 54,300January 29, 2022, 38,144 shares of the Company’sour common stock were issued pursuant to the ESPP at an average price of $10.45$11.81 per share for a total of $0.6$0.5 million.
Inflation
The Company does not believe that inflation trends in the U.S. and internationally over the last three years have had a significant effect on net revenue or profitability.
Seasonality
The Company’s business is impacted by the general seasonal trends characteristic of the apparel and retail industries. The retail operations in the Americas and Europe are generally stronger during the second half of the fiscal year, and the wholesale operations in the Americas generally experience stronger performance from July through November. The European wholesale businesses operate with two primary selling seasons: the Spring/Summer season, which ships from November to April and the Fall/Winter season, which ships from May to October. The Company may take advantage of early-season demand and potential reorders in its European wholesale business by offering a pre-collection assortment which ships at the beginning of each season. Customers retain the ability to request early shipment of backlog orders or delay shipment of orders depending on their needs.
Critical Accounting Policies and Estimates
The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the U.S., which require management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on its historical experience, an evaluation of current market trends as of the reporting date and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management evaluates its estimates and judgments on an ongoing basis including those related to the allowances for doubtful accounts, sales return and markdown allowances, gift card and loyalty accruals, valuation of inventories, share-based compensation, recoverability of deferred taxes, unrecognized tax benefits, the useful life of assets for depreciation and amortization, evaluation of asset impairment (including goodwill and long-lived assets, such as property and equipment and operating lease right-of-use (“ROU”) assets), pension obligations, workers’ compensation and medical self-insurance expense and accruals, litigation reserves and restructuring expense and accruals.
The Company believesWe believe that the following significant accounting policies involve a higher degree of judgment and complexity. In addition to the accounting policies mentioned below, seerefer to “Part IV. Financial Statements – Note 1 to – Description of the Consolidated Financial StatementsBusiness and Summary of Significant Accounting Policies and Practices” in this Form 10-K for other significant accounting policies.
Allowances for Doubtful Accounts
In the normal course of business, the Company grantswe grant credit directly to certain wholesale customers after a credit analysis is performed based on financial and other criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. The Company maintains We maintain allowances for doubtful accounts for estimated losses that result from the inability of itsour wholesale customers to make their required payments.The Company bases its We base our allowances on analysis of the aging of accounts receivable at the date of the financial statements, assessments of historical and current collection trends, an evaluation of the impact of current economic conditions and whether the Company haswe obtained credit insurance or other guarantees.guarantees which are not considered freestanding against the related account receivable balances.
Sales Return Allowances
The Company accruesWe accrue for estimated sales returns in the period in which the related revenue is recognized. To recognize the financial impact of sales returns, the Company estimateswe estimate the amount of goods that will be returned based on historical experience and reducescurrent trends and reduce sales and cost of sales accordingly. The Company’saccordingly. Our policy allows retail customers in certain regions a grace period to return merchandise following the date of sale. Substantially all of these returns are considered to be resalable at a price that exceeds the cost of the merchandise. We include the allowance for sales returns in accrued expenses and the estimated cost associated with such sales returns within other current assets in our consolidated balance sheet.
Markdown Allowances
Costs associated with customer markdowns are recorded as a reduction to revenues and any amounts unapplied amountsto existing receivables are included in the allowance for accounts receivable.accrued expenses. Historically, these markdown allowances resulted from seasonal negotiations with the Company’sour wholesale customers, as well as historical trends and the evaluation of the impact of current economic conditions.
Gift Card BreakageCards
Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by the Companyus for which a liability was recorded in prior periods. Gifts cards are mainly used in the U.S. and Canada. The Company issues itsWe issue our gift cards in the U.S. and Canada through one of itsour subsidiaries and isare not required by law to escheat the value of unredeemed gift cards to the state in which the subsidiary is domiciled. Estimated breakage amounts are accounted for under the redemption recognition method and are classified as additional net revenues as the gift cards are redeemed. The CompanyWe determined a gift card breakage rate based upon historical redemption patterns, which represented the cumulative estimated amount of gift card breakage from the inception of the electronic gift card program in late 2002. Any future revisions to the estimated breakage rate may result in changes in the amount of breakage income recognized in future periods. See Note 1 to the Consolidated Financial Statements for further information regarding the recognition of gift card breakage.
Loyalty Programs
The Company hasWe have customer loyalty programs in North America, Europe and Asia which cover all of itsour brands. Under certain of the programs, primarily in the U.S. and Canada, customers accumulate points based on purchase
activity. Once a loyalty program member achieves a certain point level, the member earns awards that may only be redeemed for merchandise. Unredeemed points generally expire after six months without additional purchase activity and unredeemed awards generally expire after two months. The Company usesWhere applicable, we allocate a portion of the transaction price from sales in our direct-to-consumer channel to our loyalty program by using historical redemption rates to estimate the value of future award redemptions which areredemptions. This amount is accrued in current liabilities and recorded as a reduction of net revenue in the period which the related revenue is recognized.The aggregate dollar value of the loyalty program accruals included in accrued expenses was $3.8 million and$4.0 million as of February 3, 2018 and January 28, 2017, respectively. Future revisions to the estimated liability may result in changes to net revenue.
Inventory Reserves
Inventories are valued at the lower of cost (primarily weighted average method) or net realizable value. The CompanyWe continually evaluates itsevaluate our inventories by assessing slow moving product as well as prior seasons’ inventory. Net realizable value of aged inventory is estimated based on historical sales trends for each product line category, the impact of market trends, an evaluation of economic conditions, available liquidation channels and the value of current orders relating to the future sales of this type of inventory. The Company We closely monitorsmonitor off-price sales to ensure the actual results closely match initial estimates. Estimates are regularly updated based upon this continuing review.
Share-Based Compensation
The Company recognizesWe recognize compensation expense for all share-based awards granted based on the grant date fair value. The fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model and involves several assumptions, including the risk-free interest rate, expected volatility, dividend yield and expected life. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected stock price volatility is determined based on an average of both historical volatility and implied volatility. Implied volatility is derived from exchange traded options on the Company’sour common stock.The expected dividend yield is based on the Company’sour history and expectations of dividend payouts. The expected life is determined based on historical trends. Compensation expense for nonvested stock options and
stock awards/units that are not subject to performance-based vesting conditions is recognized on a straight-line basis over the vesting period. During fiscal 2018, the Company adopted authoritative guidance which eliminates the requirement to estimate forfeitures, but rather provides for an election that would allow entitiesWe have elected to account for forfeitures as they occur.
In addition, the Company haswe have granted certain nonvested units that require certain minimum performance targets to be achieved in order for these awards to vest. Vesting is also subject to continued service requirements through the vesting date. Compensation expense for performance-based awards that vest in increments is recognized based on an accelerated attribution method. If the minimum performance targets are not forecasted to be achieved, no expense is recognized during the period.
The Company hasWe have also granted certain nonvested stock units which are subject to market-based performance targets in order for these units to vest. Vesting is also subject to continued service requirements through the vesting date. The grant date fair value for such nonvested stock units was estimated using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the performance period. Compensation expense for such nonvested stock units is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied.
During fiscal 2016, the Company granted certainCertain restricted stock units which vestedvest immediately but wereare considered contingently returnable as a result of certain service conditions. Compensation expense for these types of restricted stock units wasare recognized on a straight-line basis over the implied service period.
Derivatives
Foreign Exchange Currency Contracts
The Company operatesWe operate in foreign countries, which exposes itus to market risk associated with foreign currency exchange rate fluctuations.The Company has We have entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. The Company hasWe have elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges.
The Company’sOur primary objective is to hedge the variability in forecasted cash flows due to the foreign currency risk. Various transactions that occur primarily in Europe, Canada, South Korea, China, Hong Kong, and Mexico are denominated in U.S. dollars, British pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar denominateddollar-denominated purchases of merchandise and U.S. dollardollar- and British pound denominatedpound-denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. Further, there are certain real estate leases which are denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). The Company entersAs a result, we may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end. We enter into derivative financial instruments, including forward exchange currency contracts, to offset some but not all of the exchange risk oncertain of these anticipated foreign currency transactions. Changes in the fair value of forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales or other income and expense in the period which approximates the time the hedged merchandise inventory is sold or the hedged intercompany liability is incurred.sold.
Periodically, the Companywe may also use foreign exchange currency contracts to hedge the translation and economic exposures related to itsour net investments in certain of itsour international subsidiaries. Changes in the fair value of these U.S. dollar forward contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in earnings (loss) until the sale or liquidation of the hedged net investment.
The CompanyWe also hashave foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense.(expense).
Interest Rate Swap Agreements
The Company isWe are exposed to interest rate risk on itsour floating-rate debt. The Company hasWe have entered into interest rate swap agreements to effectively convert itsour floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’sour floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company hasWe have elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
Periodically, the Companywe may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense.(expense).
Income Taxes
The CompanyWe adopted authoritative guidance which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of aan income tax position taken or expected to be taken in aan income tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. Guidance was also provided on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company’s
Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As required under applicable accounting rules, the Company accrueswe accrue an amount for itsour estimate of additional income tax liability which, the Company, more likely than not, we will incur as a result of the ultimate resolution of income tax audits (“uncertain tax positions”). The Company reviewsWe review and updatesupdate the estimates used in the accrual for uncertain income tax positions, as appropriate, as more definitive information becomesor interpretations become available from taxing authorities, upon completion of income tax audits, upon receipt of assessments, upon expiration of statutes of limitation, or upon occurrence of other events. The results of operations and financial position for future periods could be impacted by changes in assumptions or resolutions of tax audits.
Deferred income tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred income tax asset or liability is expected to be realized or settled. Deferred income tax assets are
reduced by valuation allowances if we believe it is more likely than not that some portion or the entire asset will not be realized. The Company has provided for any additional tax liabilities on amounts that are estimatedWe have historically considered the undistributed earnings of our foreign subsidiaries to be repatriated from foreign operations asindefinitely reinvested. As a result of the Tax Reform.Reform, we had a substantial amount of previously taxed earnings that could be distributed to the U.S. without additional material U.S. taxation. We have not providedcontinue to evaluate our plans for otherreinvestment or repatriation of unremitted foreign earnings and regularly review our cash positions and determination of permanent reinvestment of foreign earnings. If we determine that all or a portion of such foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes and U.S. state income taxes, on undistributedbeyond the one-time transition tax. For example, as of January 29, 2022, we determined that approximately $7.4 million of such foreign earnings expectedare no longer indefinitely reinvested. The incremental tax cost to be reinvested outsiderepatriate these earnings to the U.S. Ifis immaterial. We intend to indefinitely reinvest the remaining earnings from our foreign subsidiaries for which a deferred income tax liability has not already been recorded. It is not practicable to estimate the amount of income tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation.
We completed an intra-entity transfer of intellectual property rights from a U.S. entity to a wholly-owned Swiss subsidiary, more closely aligning our intellectual property rights with our business operations. This transaction resulted in a taxable gain and income tax expense in the future we decide to repatriate such earnings, we would incur other incremental taxes. Our current plans do not indicateU.S. The U.S. taxable gain and income tax expense generated by this intercompany transfer of intellectual property was primarily offset by the recognition of a need to repatriate them to fund our U.S. cash requirements.deferred income tax asset in the Swiss subsidiary.
Valuation of Goodwill, Intangible and Other Long-Lived Assets
The Company assessesWe assess the impairment of itsour long-lived assets (i.e.,(related primarily to goodwill, intangible assets and property and equipment)equipment and operating right-of-use assets), which requires the Companyus to make assumptions and judgments regarding the carrying value of these assets on an annual basis, or more frequently if events or changes in circumstances indicate that the assets might be impaired. For goodwill, determination of impairment is made at the reporting unit level which may be either an operating segment or one level below an operating segment if discrete financial information is available. Two or more reporting units within an operating segment may be aggregated for impairment testing if they have similar economic characteristics. The Company hasWe have identified itsour Americas Retail segment, itsour Americas Wholesale segment itsand our European wholesale and European retail components of itsour Europe segment and its China retail component of its Asia segment as reporting units for goodwill impairment testing. For long-lived assets (other than goodwill), the majority relate to itsour retail operations which consist primarily of regular retail and flagship locations. The Company considersWe consider each individual regular retail location as an asset group for impairment testing, which is the lowest level at which individual cash flows can be identified.The asset group includes leasehold improvements, furniture, fixtures and equipment, computer hardware and software, operating lease right-of-use (“ROU”) assets including lease acquisition costs, and certain long-term security deposits, and excludes operating lease acquisition costs. The Company reviewsliabilities. We review regular retail locations in penetrated markets for impairment risk once the locations have been opened for at least one year in their current condition, or sooner as changes in circumstances require. The Company believesWe believe that waiting at least one year allows a location to reach a maturity level where a more comprehensive analysis of financial performance can be performed. The Company evaluatesWe evaluate impairment risk for regular retail locations in new markets, where the Company iswe are in the early stages of establishing itsour presence, once brand awareness has been established. The CompanyWe also evaluatesevaluate impairment risk for retail locations that are expected to be closed in the foreseeable future. The Company hasWe have flagship locations which are used as a regional marketing tool to build brand awareness and promote the Company’sour current product. ImpairmentProvided the flagship locations continue to meet appropriate criteria, impairment for these locations is tested at a reporting unit level similar to goodwill since they do not have separately identifiable cash flows.
An asset is considered to be impaired if the Company determineswe determine that the carrying value may not be recoverable based upon itsour assessment of the asset’s ability to continue to generate earnings from operations and positive cash flow in future periods or if significant changes in the Company’sour strategic business objectives and utilization of the assets occurred. If the assets (other than goodwill) are assessed to be recoverable, they are depreciated or amortized over the periods benefited. If the assets are considered to be impaired, an impairment charge is recognized representing the amount by which the carrying value of the assets exceeds the fair value of those assets. FairWe use market participant rents to calculate fair value is determined based upon theof ROU assets and discounted future cash flows derived fromof the underlying asset.asset group to quantify fair value for other long-lived assets. The Company uses various assumptionsimpairment loss calculations require management to apply judgment in determining current fair market value of these assets, includingestimating future expected cash flows and the discount rates. rates that reflect the risk inherent in future cash flows. Future expected cash flows for assets in regular retail locations are based on management’s estimates of future cash flows, which include sales and gross margin growth rate assumptions, over the remaining lease period or expected life, if shorter. For expected location closures, the Companywe will evaluate whether it is necessary to shorten the useful life for any of the assets within the respective asset group. The CompanyWe will use this revised useful life when estimating the asset group’s future cash flows. The Company considersWe consider historical trends, expected future business trends and other factors when estimating the future cash flow for each regular retail location. The CompanyWe also considersconsider factors such as: the local environment for each regular retail location, including mall traffic and competition; the Company’sour ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll and, in some cases, renegotiate lease costs. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the Company’sour results of operations. See Notes 1 and 5 to the Consolidated Financial Statements for further discussion.
Pension Benefit Plan Actuarial Assumptions
The Company’sOur pension obligations and related costs are calculated using actuarial concepts, within the authoritative guidance framework. The Company usesWe use the corridor approach to amortize unrecognized actuarial gains
or losses over the average remaining service life of active participants. The life expectancy, estimated retirement age, discount rate, estimated future compensation and expected return on plan assets are important elements of expense and/or liability measurement. These critical assumptions are evaluated annually which enables expected future payments for benefits to be stated at present value on the measurement date. If actual results are not consistent with actuarial
assumptions, the amounts recognized for the defined benefit plans could change significantly. Refer to Note 12 to the Consolidated“Part IV. Financial Statements – Note 13 – Defined Benefit Plans” in this Form 10-K for detail regarding the Company’sour defined benefit plans.
Litigation Reserves
Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. As additional information becomes available, the Company assesseswe assess the potential liability related to new claims and existing claims and revisesrevise estimates as appropriate. As new claims arise or existing claims evolve, such revisions in estimates of the potential liability could materially impact the results of operations and financial position.
In April 2019, we issued $300 million principal amount of 2.00% convertible senior notes due 2024 in a private offering.
Certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The liability component was recorded at fair value, which was derived from a valuation technique used to calculate the fair value of a similar liability without an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Notes and the fair value of the liability component of the Notes.
In accounting for the debt issuance costs related to the issuance of the Notes, we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component were recorded as a contra-liability and are presented net against the convertible senior notes balance on our consolidated balance sheets. These costs are amortized to interest expense using the effective interest method over the term of the Notes. Refer to “Part IV. Financial Statements – Note 2 – New Accounting Guidance” and “Part IV. Financial Statements – Note 10 – Convertible Senior Notes and Related Transactions” in this Form 10-K for details on our convertible senior notes.
Recently Issued Accounting Guidance
In May 2014, theRefer to “Part IV. Financial Statements – Note 2 – New Accounting Standards Board (“FASB”)Guidance” in this Form 10-K for disclosures about recently issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognitionaccounting guidance. The standard is intended to clarify the principles of recognizing revenue and create common revenue recognition guidance between GAAP and International Financial Reporting Standards. The standard also requires expanded disclosures surrounding revenue recognition. During fiscal 2017, the FASB issued additional clarification guidance on the new revenue recognition standard which also included certain scope improvements and practical expedients. The standard (including clarification guidance issued) is effective for fiscal periods beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and allows for either full retrospective or modified retrospective adoption, with early adoption permitted. The Company has adopted this guidance using the modified retrospective method beginning in the first quarter of fiscal 2019. The Company’s assessment efforts have included reviewing current revenue processes, arrangements and accounting policies to identify potential differences that could arise from the application of this standard on its consolidated financial statements and related disclosures. While the Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements, the Company expects there to be differences related primarily to the classification and timing of when revenue and certain expenses are recognized from its licensing business. These differences relate primarily to changes in the presentation of advertising contributions received from the Company’s licensees and related advertising expenditures incurred by the Company. The Company currently records advertising contributions received from its licensees and the related advertising expenditures incurred by the Company on a net basis in its consolidated balance sheet. To the extent that the advertising contributions exceed the Company’s advertising expenditures for its licensees, the excess contribution is treated as a deferred liability and is included in accrued expenses in the Company’s consolidated balance sheet. Under the new standard, advertising contributions and related advertising expenditures related to the Company’s licensing business will be recorded on a gross basis which will increase net revenue as well as SG&A expenses. The Company also expects revenue related to its e-commerce operations to be recognized when merchandise is transferred to a common carrier rather than upon receipt by the customer, as well as adjustments to the accounting for the Company’s loyalty programs due to a slight change in the valuation of the amount that is deferred related to points earned. Additionally, allowances for wholesale sales returns and wholesale markdowns will be presented as accrued expenses rather than as reductions to accounts receivable and the estimated cost of inventory associated with the allowance for sales returns will be presented within other current assets in the Company’s consolidated balance sheet.
In January 2016, the FASB issued authoritative guidance which requires equity investments not accounted for under the equity method of accounting or consolidation accounting to be measured at fair value, with subsequent changes in fair value recognized in net income. In February 2018, the FASB issued additional clarification guidance which made targeted improvements to address certain aspects of recognition, measurement, presentation and disclosure requirements for financial instruments. The original guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The clarification guidance is effective for fiscal years beginning after December 15, 2017 and interim periods beginning after June 15, 2015, which will be the Company’s third quarter of fiscal 2019. The clarification guidance may be early adopted, provided that the
original guidance issued has been adopted. The adoption of this guidance (including the clarification guidance) is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures unless the Company acquires new equity investments.
In February 2016, the FASB issued a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize assets and liabilities related to long-term leases that were classified as operating leases under previous guidance in its balance sheet. An asset would be recognized related to the right to use the underlying asset and a liability would be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases. The standard is effective for fiscal periods beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020, and requires modified retrospective adoption, with early adoption permitted. The Company expects that this adoption will result in material increases in assets and liabilities in its consolidated balance sheet as well as enhanced disclosures. The Company is in the process of implementing controls and system changes to enable the preparation of the required financial information for this standard.
In June 2016, the FASB issued authoritative guidance related to the measurement of credit losses on financial instruments. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021. Early adoption is permitted for fiscal periods beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued authoritative guidance which amends the accounting for income taxes on intra-entity transfers of assets other than inventory. This guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The income tax consequences on intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is permitted at the beginning of a fiscal year. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.
In January 2017, the FASB issued authoritative guidance to simplify the testing for goodwill impairment by removing step two from the goodwill testing. Under current guidance, if the fair value of a reporting unit is lower than its carrying amount (step one), an entity would calculate an impairment charge by comparing the implied fair value of goodwill with its carrying amount (step two). The implied fair value of goodwill was calculated by deducting the fair value of the assets and liabilities of the respective reporting unit from the reporting unit’s fair value as determined under step one. This guidance instead provides that an impairment charge should be recognized based on the difference between a reporting unit’s fair value and its carrying value. This guidance also does not require a qualitative test to be performed on reporting units with zero or negative carrying amounts. However, entities need to disclose any reporting units with zero or negative carrying amounts that have goodwill and the amount of goodwill allocated to each. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.
In March 2017, the FASB issued authoritative guidance related to the presentation of net periodic pension cost in the income statement. This guidance requires that the service cost component of net periodic pension cost is presented in the same line as other compensation costs arising from services rendered by the employees during the period. The other non-service components of net periodic pension cost are required to be presented in the income statement separately from the service cost component and outside of earnings from operations. This guidance also allows for the service cost component to be eligible for capitalization when applicable. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and requires retrospective adoption for the presentation of the service cost component and other non-service components of net periodic pension cost in the income statement and prospective adoption for capitalization of the service cost component. Other than the change in presentation of other non-service components of net periodic pension cost
within the Company’s consolidated statements of income, the adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements and related disclosures.
In May 2017, the FASB issued authoritative guidance that provides clarification on accounting for modifications in share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, with early adoption permitted. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements or related disclosures unless there are modifications to the Company’s share-based payment awards.
In August 2017, the FASB issued authoritative guidance to better align the results of hedge accounting with an entity’s risk management activities. This guidance updates the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. This guidance is effective for fiscal years beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with early adoption permitted. The updated presentation and disclosure guidance is required only on a prospective basis. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Exchange Rate Risk
More than halftwo-thirds of product sales and licensing revenue recorded for the year ended February 3, 2018January 29, 2022 were denominated in currencies other than the U.S. dollar. The Company’sOur primary exchange rate risk relates to operations in Europe, Canada, South Korea, China, Hong Kong, and Mexico. Changes in currencies affect our earnings in various ways. For further discussion on currency-related risk, please refer to our risk factors under “Part I, Item 1A. Risk Factors.”
Various transactions that occur primarily in Europe, Canada, South Korea, China, Hong Kong, and Mexico are denominated in U.S. dollars, British pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar denominateddollar-denominated purchases of merchandise and U.S. dollardollar- and British pound denominatedpound-denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. Further, there are certain real estate leases which are denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). The Company isAs a result, we may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end. We are also subject to certain translation and economic exposures
related to itsour net investment in certain of itsour international subsidiaries. The Company entersWe enter into derivative financial instruments to offset some but not all of itsour exchange risk. In addition, some of the derivative contracts in place will create volatility during the fiscal year as they are marked-to-market according to the accounting rules and may result in revaluation gains or losses in different periods from when the currency impact on the underlying transactions are realized.
Foreign Exchange Currency Contracts Designated as Cash Flow Hedges
During fiscal 2018, the Company2022, we purchased U.S. dollar forward contracts in Europe and Canada totaling US$147.6197.0 million and US$25.7 million, respectively, that were designated as cash flow hedges. As of February 3, 2018, the CompanyJanuary 29, 2022, we had forward contracts outstanding for itsour European and Canadian operations of US$145.8146.0 million and US$38.7 million, respectively, to hedge forecasted merchandise purchases, and intercompany royalties, which are expected to mature over the next 1714 months. The Company’sOur derivative financial instruments are recorded in itsour consolidated balance sheet at fair value based on quoted market rates. Changes in the fair value of the U.S. dollar forward contracts, designated as cash flow hedges for forecasted merchandise purchases, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold. Changes in the fair value of the U.S. dollar forward contracts, designated as cash flow hedges for forecasted intercompany royalties, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in other income and expense in the period in which the royalty expense is incurred.
As of February 3, 2018,January 29, 2022, accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a net unrealized lossgain of approximately $15.5$7.3 million, net of tax, of which $10.0$5.4 million will be recognized in cost of product sales or other expense over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current year-end values. As of February 3, 2018,January 29, 2022, the net unrealized lossgain of the remaining open forward contracts recorded in the Company’sour consolidated balance sheet was approximately $13.7$6.0 million.
At January 28, 2017, the Company30, 2021, we had forward contracts outstanding for itsour European and Canadian operations of US$104.2US$100.0 million and US$66.9 million, respectively, that were designated as cash flow hedges. At January 28, 2017,30, 2021, the net unrealized gainloss of these open forward contracts recorded in the Company’sour consolidated balance sheet was approximately $4.8 million.$3.3 million.
DerivativesForeign Exchange Currency Contracts Not Designated as Hedging Instruments
The CompanyWe also hashave foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense. (expense). For the year ended February 3, 2018, the CompanyJanuary 29, 2022, we recorded a net lossgain of $10.5$1.9 million for itsour euro and Canadian dollar foreign currency contracts not designated as hedges, which has been included in other expense. income (expense). As of February 3, 2018, the CompanyJanuary 29, 2022, we had euro foreign exchange currency contracts to purchase US$68.2US$19.0 million expected to mature over the next 12 months and Canadian dollartwo months. As of January 29, 2022, the net unrealized gain of these open forward contracts recorded in our consolidated balance sheet was approximately $1.1 million.
At January 30, 2021, we had euro foreign exchange currency contracts to purchase US$17.6 million expected to mature over the next 11 months. As of February 3, 2018,19.0 million. At January 30, 2021, the net unrealized loss of these open forward contracts recorded in the Company’sour consolidated balance sheet was approximately $4.3$1.2 million.
At January 28, 2017, the Company had euro foreign exchange currency contracts to purchase US$81.4 million and Canadian dollar foreign exchange currency contracts to purchase US$13.9 million. At January 28, 2017, the net unrealized gain of these open forward contracts recorded in the Company’s consolidated balance sheet was approximately $3.6 million.
Sensitivity Analysis
As of February 3, 2018,January 29, 2022, a sensitivity analysis of changes in foreign currencies when measured against the U.S. dollar indicates that, if the U.S. dollar had uniformly weakened by 10% against all of the U.S. dollar denominated foreign exchange derivatives totaling US$270.3US$165.0 million,, the fair value of the instruments would have decreased by $30.0 million.$18.3 million. Conversely, if the U.S. dollar uniformly strengthened by 10% against all of the U.S. dollar denominated foreign exchange derivatives, the fair value of these instruments would have increased by $24.6 million.$15.0 million. Any resulting changes in the fair value of the hedged instruments may be partially offset by changes in the fair value of certain balance sheet positions (primarily U.S. dollar denominated liabilities in our foreign operations) impacted by the change in the foreign currency rate. The ability to reduce the exposure of currencies on earnings depends on the magnitude of the derivatives compared to the balance sheet positions during each reporting cycle.
Interest Rate Risk
The Company isWe are exposed to interest rate risk on itsour floating-rate debt. The Company hasWe have entered into interest rate swap agreements to effectively convert itsour floating-rate debt to a fixed-rate basis. The principal objective of these
contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’sour floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company hasWe have elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts.
In April 2019, we issued $300 million principal amount of convertible senior notes in a private offering. The fair value of the convertible senior notes is subject to interest rate risk, market risk and other factors due to its conversion feature. The fair value of the convertible senior notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the convertible senior notes but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the convertible senior notes at face value, less any unamortized discount on our balance sheet and we present the fair value for disclosure purposes only.
Interest Rate Swap Agreement Designated as Cash Flow Hedge
During fiscal 2017, the Companywe entered into an interest rate swap agreement with a notional amount of $21.5 million, designated as a cash flow hedge, to hedge the variability of cash flows in interest payments associated with the Company’sour floating-rate debt. This interest rate swap agreement matures in January 2026 and converts the nature of the Company’sour real estate secured term loan from LIBOR floating-rate debt to fixed-rate debt, resulting in a swap fixed rate of approximately 3.06%. The fair value of the interest rate swap agreement is based upon inputs corroborated by observable market data. Changes in the fair value of the interest rate swap agreement, designated as a cash flow hedge to hedge the variability of cash flows in interest payments associated with the Company’sour floating-rate debt,real estate secured loan (the “Mortgage Debt”), are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
As of February 3, 2018,January 29, 2022, accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized gainloss of approximately $1.1$0.1 million, net of tax, which will be recognized in interest expense afterover the following 12 months, at the then current values on a pre-tax basis, which can be different than the current year-end values. As of February 3, 2018,January 29, 2022, the net unrealized gainloss of the interest rate swap recorded in the Company’sour consolidated balance sheet was approximately $1.5$0.1 million.
At January 28, 2017,30, 2021, the net unrealized gainloss of the interest rate swap recorded in the Company’s condensedour consolidated balance sheet was approximately $0.9$1.0 million.
Sensitivity Analysis
As of February 3, 2018, approximately 93% of the Company’s totalJanuary 29, 2022, we had indebtedness related to a real estate secured term loanloans of $48.3 million, finance lease obligations of $22.9 million and capitalthe Mortgage Debt of $17.9 million. The term loans provide for annual interest rates ranging between 1.3% to 2.2%. The finance lease obligations.obligations are based on fixed interest rates derived from the respective agreements. The real estate secured loanMortgage Debt is covered by a separate interest rate swap agreement with a swap fixed interest rate of approximately 3.06% that matures in January 2026. The interest rate swap agreement is designated as a cash flow hedge and converts the nature of the Company’sour real estate secured term loan from LIBOR floating-rate debt to fixed-rate debt. The capital lease obligations
As of January 29, 2022, we also had borrowings under our short-term borrowing arrangements of $12.2 million which are based on fixed interest rates derived from the respective agreements.
The Company’s remaining indebtedness is at variable rates of interest. Accordingly, changes in interest rates would impact the Company’sour results of operations in future periods. A 100 basis point increase in interest rates would not have had an insignificanta significant effect on interest expense for the year ended February 3, 2018.January 29, 2022.
The fair valuevalues of the Company’sour debt instruments are based on the amount of future cash flows associated with each instrument discounted using the Company’sour incremental borrowing rate. As of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, the carrying value of all financial instruments was not materially different from fair value,, as the interest rates on the Company’sour debt approximated rates currently available to us. The fair value of our convertible senior notes is determined based on inputs that are observable in the Company.
market and have been classified as Level 2 in the fair value hierarchy.
Derivatives Designated as Hedging Instruments
The following table summarizes net after-tax activity related to the Company’sour foreign exchange currency contracts and interest rate swap agreement designated as cash flow hedges recorded in accumulated other comprehensive income (loss) (in thousands):
| | | | | | | | | | | | |
| | Year Ended Jan 29, 2022 | | Year Ended Jan 30, 2021 |
Beginning balance gain (loss) | | $ | (4,876) | | | $ | 6,300 | |
| | | | |
Net gains (losses) from changes in cash flow hedges | | 10,121 | | | (5,709) | |
Net (gains) losses reclassified to earnings (loss) | | 2,035 | | | (5,467) | |
Ending balance gain (loss) | | $ | 7,280 | | | $ | (4,876) | |
|
| | | | | | | |
| Year Ended Feb 3, 2018 | | Year Ended Jan 28, 2017 |
Beginning balance gain | $ | 5,400 |
| | $ | 7,252 |
|
Net gains (losses) from changes in cash flow hedges | (20,408 | ) | | 1,059 |
|
Net (gains) losses reclassified to earnings (loss) | 414 |
| | (2,911 | ) |
Net losses reclassified to retained earnings (1) | 225 |
| | — |
|
Ending balance gain (loss) | $ | (14,369 | ) | | $ | 5,400 |
|
| |
(1) | During the fourth quarter of fiscal 2018, the Company early adopted authoritative guidance which addresses certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the Tax Reform enacted in December 2017. As a result, the Company recorded a cumulative adjustment to reduce retained earnings by $0.2 million with a corresponding increase to accumulated other comprehensive income (loss) related to the Company’s interest rate swap designated as a cash flow hedge.
|
ITEM 8. Financial Statements and Supplementary Data.
The information required by this Item is incorporated herein by reference to the Consolidated Financial Statements and Supplementary Data listed in “Item 15” of Part IV of this report.
ITEM 9. Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting
The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules which require the Company to include in its Annual Reports on Form 10-K, an assessment by management of the effectiveness of the Company’s internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. In addition, the Company’s independent auditors must attest to and report on the effectiveness of the Company’s internal control over financial reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s internal
control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based upon this evaluation, under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of February 3, 2018.January 29, 2022.
Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s financial statements as of and for the fiscal year ended February 3, 2018January 29, 2022 included in this Annual Report on Form 10-K has issued an attestation report on the Company’s internal control over financial reporting, which is set forth below.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the fourth quarter of fiscal 20182022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Board of Directors and Stockholders of Guess?, Inc. and Subsidiaries
Opinion on Internal Control Over Financial Reporting
We have audited Guess?, Inc. and subsidiaries’ internal control over financial reporting as of February 3, 2018,January 29, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Guess?, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of February 3, 2018,January 29, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, and the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended February 3, 2018,January 29, 2022, and the related notes and the financial statement schedule listed in the Index at ITEM 15(a)(2) and our report dated March 29, 201824, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements..statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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/s/ ERNSTErnst & YOUNGYoung LLP | |
Los Angeles, California
March 29, 2018
24, 2022
ITEM 9B. Other Information.
On March 27, 2018, the Board of Directors of the Company approved an immediately effective amendment and restatement of the Bylaws of the Company (the “Third Amended and Restated Bylaws”) which added a new Article XI. The new Article XI providesNone.
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another state court located within the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Company, (b) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company to the Company or the Company’s stockholders, (c) any action asserting a claim arising pursuant to any provision of the General Corporation law of the State of Delaware, the Certificate of Incorporation of the Company or the Bylaws of the Company, and (d) any action asserting a claim against the Company or any director or officer or other employee of the Company governed by the internal affairs doctrine.Prevent Inspections.
The Third Amended and Restated Bylaws are filed as Exhibit 3.2 to this Annual Report on Form 10-K and are incorporated by reference herein. The foregoing summary is qualified in its entirety by reference to the full text of the Third Amended and Restated Bylaws.Not Applicable.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance.
The information required by this item can be found under the captions “Directors and Executive Officers,”Officers” and “Corporate Governance and Board Matters,” and “Section 16(a) Beneficial Ownership Reporting Compliance”Matters” in the Company’s Proxy Statement (the “Proxy Statement”) to be filed with the SEC not later than 120 days after the end of our fiscal year and is incorporated herein by reference.
In addition, our Board of Directors has adopted a Code of Ethics that applies to all of our directors, employees and officers, including our Chief Executive Officer and Chief Financial Officer. The current version of the Code of Ethics is available on our investor website, which can be found at http://investors.guess.com. To the extent required by rules adopted by the SEC and The New York Stock Exchange, we intend to promptly disclose future amendments to certain provisions of the Code of Ethics, or waivers of such provisions granted to executive officers and directors, on our investor website. ITEM 11. Executive Compensation.
The information required by this item can be found under the caption “Executive and Director Compensation,” excluding the Compensation Committee Report on Executive Compensation, in the Proxy Statement and is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item can be found under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement and is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item can be found under the captions “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters—Board Independence, Structure and Committee Composition” in the Proxy Statement and is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services.
The information required by this item can be found under the caption “Relationship with Independent Registered Public Accountant” in the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.
(a) Documents Filed with Report
| |
(1) | Consolidated Financial Statements |
(1)Consolidated Financial Statements
The Report of Independent Registered Public Accounting Firm and financial statements listed on the accompanying Index to Consolidated Financial Statements and Financial Statement Schedule are filed as part of this report.
| |
(2) | Consolidated Financial Statement Schedule |
(2)Consolidated Financial Statement Schedule
The financial statement schedule listed on the accompanying Index to Consolidated Financial Statements and Financial Statement Schedule is filed as part of this report.
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.
(3)Exhibits
The exhibits listed onin the accompanyingbelow Exhibit Index are filed or incorporated by reference as part of this report.
Exhibit Index
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Exhibit Number | | Description | |
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| | Loan, Guaranty and Security Agreement dated as of June 23, 2015, among the Registrant, Guess? Retail, Inc., Guess.com, Inc., Guess? Canada Corporation, the guarantors party thereto, the lenders party thereto and Bank of America, N.A., as agent for the lenders (incorporated by reference from the Registrant’s Current Report on Form 8-K filed June 24, 2015). | |
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Exhibit Number | | Description | |
| | Amendment Number One to Loan, Guaranty and Security Agreement dated as of February 16, 2016, among the Registrant, Guess? Retail, Inc., Guess.com, Inc., Guess? Canada Corporation, the guarantors party thereto, the lenders party thereto and Bank of America, N.A., as agent for the lenders (incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended January 30, 2016). | |
| | Amendment Number Two to Loan, Guaranty and Security Agreement, dated as of April 22, 2019, by and among the Registrant, Guess? Retail, Inc., Guess.com, Inc., Guess? Canada Corporation, Bank of America, N.A., as agent for the lenders, and each of the lenders party thereto (incorporated by reference from the Registrant’s Current Report on Form 8-K filed April 22, 2019). | |
| | Amendment Number Three to Loan, Guaranty and Security Agreement dated as of April 21, 2020, among Guess?, Inc., Guess? Retail, Inc., Guess.com, Inc., Guess? Canada Corporation, the guarantors party thereto, the lenders party thereto and Bank of America, N.A., as agent for the lenders (incorporated by reference from the Registrant’s Current Report on Form 8-K filed April 22, 2020). | |
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†101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
†101.SCH | | XBRL Taxonomy Extension Schema Document | |
†101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | |
†101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | |
†101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | |
†101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | |
†104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
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* | Management Contract or Compensatory Plan |
† | Filed herewith |
†† | Furnished herewith |
ITEM 16. Form 10-K Summary.
None.
Guess?, Inc.
Form 10-K
Index to Consolidated Financial Statements and Financial Statement Schedule
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Board of Directors and Stockholders of Guess?, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Guess?, Inc. and subsidiaries (the(the Company) as of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, and the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended February 3, 2018,January 29, 2022, and the related notes and the financial statement schedule listed in the Index at ITEM 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended February 3, 2018,January 29, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of February 3, 2018,January 29, 2022, based on criteria established in Internal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 29, 201824, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements and schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’s financial statements and schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includeincluded examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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| | Impairment of right-of-use assets and property and equipment |
/s/ ERNST & YOUNG LLP
| | |
Description of the Matter | | As described in Note 1 to the consolidated financial statements, to assess its regular retail store asset groups for impairment, the Company utilizes significant judgment in evaluating whether a regular retail store asset group may be impaired based upon its ability to generate earnings from operations and positive future cash flows in future periods or if there are significant changes in the Company’s strategic business objectives and utilization of assets. Any impairment of a regular retail store asset group would be allocated between the operating lease right-of-use assets and property and equipment such that the asset group is recorded at fair value. |
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| | Auditing management’s analyses of the impairment measurement for the regular retail locations involved a high degree of subjectivity, as estimates underlying the determination of fair value of a regular retail store asset group were based on assumptions that may be affected by future operations of the Company, market or economic conditions. The Company uses various assumptions in determining current fair market value of its regular retail store asset group, including future expected cash flows. The significant assumptions used in calculating future expected cash flows are forecasted sales and gross margins. Future expected cash flows for a regular retail store asset group are based on management’s estimates of future cash flows over the remaining lease period or expected life, if shorter. |
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How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s processes to determine the fair value of regular retail store asset groups and measure any impairment as of the fiscal year end or as impairment indicators are identified under Accounting Standards Codification (ASC) 360. This included controls over management’s determination and assessment of the sales and gross margin growth rates underlying the fair value calculation.
Our audit procedures included, among others, evaluating the significant assumptions for the determination of fair value of regular retail asset groups as of the fiscal year end or as impairment indicators are identified under ASC 360 and testing the underlying data used in management’s estimation for relevancy, completeness and accuracy. Evaluating the significant assumptions used by management in the impairment assessment involved considering current and past performance of the regular retail store asset group, evaluating whether the assumptions were consistent with evidence obtained in other areas of the audit and with key performance indicators across the industry. We have also evaluated the Company’s long-lived asset impairment disclosures included in Note 5 and Note 9 in relation to this matter. |
We have served as the Company’s auditor since 2007.
Los Angeles, California
March 29, 2018
24, 2022
GUESS?, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | February 3, 2018 | | January 28, 2017 | | January 29, 2022 | | January 30, 2021 |
ASSETS | | | | ASSETS | | | |
Current assets: | | | | Current assets: | | | |
Cash and cash equivalents | $ | 367,441 |
| | $ | 396,129 |
| Cash and cash equivalents | $ | 415,565 | | | $ | 469,110 | |
Accounts receivable, net | 259,996 |
| | 225,537 |
| Accounts receivable, net | 328,856 | | | 314,147 | |
Inventories | 428,304 |
| | 367,381 |
| Inventories | 462,295 | | | 389,144 | |
Other current assets | 52,964 |
| | 54,965 |
| Other current assets | 77,378 | | | 60,123 | |
Total current assets | 1,108,705 |
| | 1,044,012 |
| Total current assets | 1,284,094 | | | 1,232,524 | |
Property and equipment, net | 294,254 |
| | 243,005 |
| Property and equipment, net | 228,765 | | | 216,196 | |
Goodwill | 38,481 |
| | 34,100 |
| Goodwill | 34,885 | | | 36,736 | |
Other intangible assets, net | 5,977 |
| | 6,504 |
| |
Deferred tax assets | 68,386 |
| | 82,793 |
| |
Deferred income tax assets | | Deferred income tax assets | 165,120 | | | 72,417 | |
Restricted cash | 241 |
| | 1,521 |
| Restricted cash | — | | | 235 | |
Operating right-of-use assets | | Operating right-of-use assets | 685,799 | | | 764,804 | |
Other assets | 139,590 |
| | 122,550 |
| Other assets | 156,965 | | | 142,956 | |
| $ | 1,655,634 |
| | $ | 1,534,485 |
| | $ | 2,555,628 | | | $ | 2,465,868 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | | Current liabilities: | | | |
Current portion of capital lease obligations and borrowings | $ | 2,845 |
| | $ | 566 |
| |
Current portion of borrowings and finance lease obligations | | Current portion of borrowings and finance lease obligations | $ | 43,379 | | | $ | 38,710 | |
Accounts payable | 264,438 |
| | 209,616 |
| Accounts payable | 325,797 | | | 300,427 | |
Accrued expenses | 200,562 |
| | 135,271 |
| |
Accrued expenses and other current liabilities | | Accrued expenses and other current liabilities | 253,182 | | | 200,602 | |
Current portion of operating lease liabilities | | Current portion of operating lease liabilities | 195,516 | | | 222,800 | |
Total current liabilities | 467,845 |
| | 345,453 |
| Total current liabilities | 817,874 | | | 762,539 | |
Long-term debt and capital lease obligations | 39,196 |
| | 23,482 |
| |
Deferred rent and lease incentives | 81,564 |
| | 80,209 |
| |
Convertible senior notes, net | | Convertible senior notes, net | 270,595 | | | 258,614 | |
Long-term debt and finance lease obligations | | Long-term debt and finance lease obligations | 60,970 | | | 68,554 | |
| Long-term operating lease liabilities | | Long-term operating lease liabilities | 582,757 | | | 662,657 | |
Other long-term liabilities | 127,964 |
| | 99,895 |
| Other long-term liabilities | 160,289 | | | 144,004 | |
| 716,569 |
| | 549,039 |
| | 1,892,485 | | | 1,896,368 | |
Redeemable noncontrolling interests | 5,590 |
| | 4,452 |
| Redeemable noncontrolling interests | 9,500 | | | 3,920 | |
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Commitments and contingencies (Note 14) |
|
| |
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Commitments and contingencies (Note 15) | | Commitments and contingencies (Note 15) | 0 | | 0 |
| | | | |
Stockholders’ equity: | | | | Stockholders’ equity: | | | |
Preferred stock, $.01 par value. Authorized 10,000,000 shares; no shares issued and outstanding | — |
| | — |
| Preferred stock, $.01 par value. Authorized 10,000,000 shares; no shares issued and outstanding | — | | | — | |
Common stock, $.01 par value. Authorized 150,000,000 shares; issued 141,623,687 and 140,509,974 shares, outstanding 81,371,118 and 84,069,492 shares, as of February 3, 2018 and January 28, 2017, respectively | 813 |
| | 841 |
| |
Common stock, $.01 par value. Authorized 150,000,000 shares; issued 142,771,946 and 142,793,679 shares, outstanding 62,697,032 and 64,230,162 shares as of January 29, 2022 and January 30, 2021, respectively | | Common stock, $.01 par value. Authorized 150,000,000 shares; issued 142,771,946 and 142,793,679 shares, outstanding 62,697,032 and 64,230,162 shares as of January 29, 2022 and January 30, 2021, respectively | 627 | | | 642 | |
Paid-in capital | 498,249 |
| | 480,435 |
| Paid-in capital | 565,024 | | | 553,111 | |
Retained earnings | 1,132,173 |
| | 1,215,079 |
| Retained earnings | 1,158,664 | | | 1,034,823 | |
Accumulated other comprehensive loss | (93,062 | ) | | (161,389 | ) | Accumulated other comprehensive loss | (135,549) | | | (120,675) | |
Treasury stock, 60,252,569 and 56,440,482 shares as of February 3, 2018 and January 28, 2017, respectively | (621,354 | ) | | (565,744 | ) | |
Treasury stock, 80,074,914 and 78,563,517 shares as of January 29, 2022 and January 30, 2021, respectively | | Treasury stock, 80,074,914 and 78,563,517 shares as of January 29, 2022 and January 30, 2021, respectively | (966,108) | | | (924,238) | |
Guess?, Inc. stockholders’ equity | 916,819 |
| | 969,222 |
| Guess?, Inc. stockholders’ equity | 622,658 | | | 543,663 | |
Nonredeemable noncontrolling interests | 16,656 |
| | 11,772 |
| Nonredeemable noncontrolling interests | 30,985 | | | 21,917 | |
Total stockholders’ equity | 933,475 |
| | 980,994 |
| Total stockholders’ equity | 653,643 | | | 565,580 | |
| $ | 1,655,634 |
| | $ | 1,534,485 |
| | $ | 2,555,628 | | | $ | 2,465,868 | |
See accompanying notes to consolidated financial statements.
GUESS?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands, except per share data)
| | | Year Ended | | Year Ended | | Year Ended | | Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 | | Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Product sales | $ | 2,290,999 |
| | $ | 2,118,534 |
| | $ | 2,100,454 |
| Product sales | $ | 2,494,922 | | | $ | 1,802,533 | | | $ | 2,592,262 | |
Net royalties | 72,755 |
| | 71,919 |
| | 84,041 |
| Net royalties | 96,709 | | | 73,996 | | | 85,847 | |
Net revenue | 2,363,754 |
| | 2,190,453 |
| | 2,184,495 |
| Net revenue | 2,591,631 | | | 1,876,529 | | | 2,678,109 | |
Cost of product sales | 1,534,906 |
| | 1,445,413 |
| | 1,397,065 |
| Cost of product sales | 1,422,126 | | | 1,179,427 | | | 1,662,401 | |
Gross profit | 828,848 |
| | 745,040 |
| | 787,430 |
| Gross profit | 1,169,505 | | | 697,102 | | | 1,015,708 | |
Selling, general and administrative expenses | 743,823 |
| | 682,559 |
| | 666,130 |
| Selling, general and administrative expenses | 861,578 | | | 679,958 | | | 865,060 | |
Net (gains) losses on lease terminations | 11,373 |
| | (695 | ) | | (2,337 | ) | |
| Asset impairment charges | 8,479 |
| | 34,385 |
| | 2,287 |
| Asset impairment charges | 3,149 | | | 80,442 | | | 9,977 | |
Restructuring charges | — |
| | 6,083 |
| | — |
| |
Earnings from operations | 65,173 |
| | 22,708 |
| | 121,350 |
| |
Net gains on lease modifications | | Net gains on lease modifications | (259) | | | (2,801) | | | — | |
| Earnings (loss) from operations | | Earnings (loss) from operations | 305,037 | | | (60,497) | | | 140,671 | |
Other income (expense): | | | | | | Other income (expense): | | | | | |
Interest expense | (2,431 | ) | | (1,897 | ) | | (1,953 | ) | Interest expense | (23,018) | | | (22,869) | | | (16,129) | |
Interest income | 4,106 |
| | 1,890 |
| | 1,045 |
| Interest income | 1,881 | | | 2,237 | | | 1,729 | |
Other income, net | 3,423 |
| | 30,909 |
| | 6,837 |
| |
Other, net | | Other, net | (30,171) | | | (5,950) | | | (2,529) | |
Total other expense | | Total other expense | (51,308) | | | (26,582) | | | (16,929) | |
| 5,098 |
| | 30,902 |
| | 5,929 |
| |
| | | | | | |
Earnings before income tax expense | 70,271 |
| | 53,610 |
| | 127,279 |
| |
Income tax expense | 74,172 |
| | 28,212 |
| | 42,464 |
| |
Earnings (loss) before income tax expense (benefit) | | Earnings (loss) before income tax expense (benefit) | 253,729 | | | (87,079) | | | 123,742 | |
Income tax expense (benefit) | | Income tax expense (benefit) | 73,680 | | | (6,338) | | | 22,513 | |
Net earnings (loss) | (3,901 | ) | | 25,398 |
| | 84,815 |
| Net earnings (loss) | 180,049 | | | (80,741) | | | 101,229 | |
Net earnings attributable to noncontrolling interests | 3,993 |
| | 2,637 |
| | 2,964 |
| Net earnings attributable to noncontrolling interests | 8,686 | | | 488 | | | 5,254 | |
Net earnings (loss) attributable to Guess?, Inc. | $ | (7,894 | ) | | $ | 22,761 |
| | $ | 81,851 |
| Net earnings (loss) attributable to Guess?, Inc. | $ | 171,363 | | | $ | (81,229) | | | $ | 95,975 | |
| | | | | | | | | | | |
Net earnings (loss) per common share attributable to common stockholders (Note 18): | | | | | | |
Net earnings (loss) per common share attributable to common stockholders: | | Net earnings (loss) per common share attributable to common stockholders: | | |
Basic | $ | (0.11 | ) | | $ | 0.27 |
| | $ | 0.97 |
| Basic | $ | 2.65 | | | $ | (1.27) | | | $ | 1.35 | |
Diluted | $ | (0.11 | ) | | $ | 0.27 |
| | $ | 0.96 |
| Diluted | $ | 2.57 | | | $ | (1.27) | | | $ | 1.33 | |
Weighted average common shares outstanding attributable to common stockholders (Note 18): | | | | | | |
Weighted average common shares outstanding attributable to common stockholders: | | Weighted average common shares outstanding attributable to common stockholders: | | |
Basic | 82,189 |
| | 83,666 |
| | 84,264 |
| Basic | 64,021 | | | 64,179 | | | 70,461 | |
Diluted | 82,189 |
| | 83,829 |
| | 84,525 |
| Diluted | 65,919 | | | 64,179 | | | 71,669 | |
| | | | | | |
Dividends declared per common share | $ | 0.90 |
| | $ | 0.90 |
| | $ | 0.90 |
| |
See accompanying notes to consolidated financial statements.
GUESS?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| | | Year Ended | | Year Ended | | Year Ended | | Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 | | Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Net earnings (loss) | $ | (3,901 | ) | | $ | 25,398 |
| | $ | 84,815 |
| Net earnings (loss) | $ | 180,049 | | | $ | (80,741) | | | $ | 101,229 | |
Other comprehensive income (loss) (“OCI”): | | | | | | Other comprehensive income (loss) (“OCI”): | |
Foreign currency translation adjustment | | | | | | Foreign currency translation adjustment | |
Gains (losses) arising during the period | 93,416 |
| | (2,632 | ) | | (37,744 | ) | Gains (losses) arising during the period | (30,857) | | | 31,115 | | | (17,114) | |
Derivative financial instruments designated as cash flow hedges | | | | | | Derivative financial instruments designated as cash flow hedges | |
Gains (losses) arising during the period | (23,388 | ) | | 887 |
| | 9,801 |
| Gains (losses) arising during the period | 11,460 | | | (6,446) | | | 9,304 | |
Less income tax effect | 2,980 |
| | 172 |
| | (1,857 | ) | Less income tax effect | (1,339) | | | 737 | | | (988) | |
Reclassification to net earnings (loss) for (gains) losses realized | 656 |
| | (3,603 | ) | | (9,147 | ) | Reclassification to net earnings (loss) for (gains) losses realized | 2,323 | | | (6,117) | | | (7,904) | |
Less income tax effect | (242 | ) | | 692 |
| | 1,298 |
| Less income tax effect | (288) | | | 650 | | | 908 | |
Marketable securities | | | | | | |
Losses arising during the period | — |
| | (4 | ) | | (19 | ) | |
Less income tax effect | — |
| | 3 |
| | 7 |
| |
Reclassification to net earnings for losses realized | — |
| | 25 |
| | — |
| |
Less income tax effect | — |
| | (9 | ) | | — |
| |
| Defined benefit plans | | | | | | Defined benefit plans | |
Net actuarial gains (losses) | (2,248 | ) | | (1,185 | ) | | 8,366 |
| Net actuarial gains (losses) | 2,805 | | | (1,003) | | | 406 | |
Plan amendment | — |
| | — |
| | 167 |
| |
| Foreign currency and other adjustments | (269 | ) | | (72 | ) | | 274 |
| Foreign currency and other adjustments | 340 | | | (383) | | | (34) | |
Less income tax effect | 518 |
| | 95 |
| | (3,339 | ) | Less income tax effect | (595) | | | 183 | | | (30) | |
Net actuarial loss amortization | 462 |
| | 341 |
| | 924 |
| Net actuarial loss amortization | 420 | | | 397 | | | 446 | |
Prior service credit amortization | (27 | ) | | (28 | ) | | (97 | ) | Prior service credit amortization | (67) | | | (66) | | | (39) | |
Curtailment | — |
| | — |
| | (1,651 | ) | |
| Less income tax effect | (83 | ) | | (74 | ) | | 367 |
| Less income tax effect | (42) | | | (36) | | | (38) | |
Total comprehensive income | 67,874 |
| | 20,006 |
| | 52,165 |
| |
Total comprehensive income (loss) | | Total comprehensive income (loss) | 164,209 | | | (61,710) | | | 86,146 | |
Less comprehensive income attributable to noncontrolling interests: | | | | | | Less comprehensive income attributable to noncontrolling interests: | |
Net earnings | 3,993 |
| | 2,637 |
| | 2,964 |
| Net earnings | 8,686 | | | 488 | | | 5,254 | |
Foreign currency translation adjustment | 2,238 |
| | (2,057 | ) | | (1,661 | ) | Foreign currency translation adjustment | (966) | | | (204) | | | 629 | |
Amounts attributable to noncontrolling interests | 6,231 |
| | 580 |
| | 1,303 |
| Amounts attributable to noncontrolling interests | 7,720 | | | 284 | | | 5,883 | |
Comprehensive income attributable to Guess?, Inc. | $ | 61,643 |
| | $ | 19,426 |
| | $ | 50,862 |
| |
Comprehensive income (loss) attributable to Guess?, Inc. | | Comprehensive income (loss) attributable to Guess?, Inc. | $ | 156,489 | | | $ | (61,994) | | | $ | 80,263 | |
See accompanying notes to consolidated financial statements.
GUESS?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | Guess?, Inc. Stockholders’ Equity | | |
| Guess?, Inc. Stockholders’ Equity | | | | | | Common Stock | | Treasury Stock | |
| Common Stock | | | | | | | | Treasury Stock | | | | | | Shares | | Amount | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Shares | | Amount | | Nonredeemable Noncontrolling Interests | | Total |
Balance at February 2, 2019 | | Balance at February 2, 2019 | 81,379,660 | | | $ | 814 | | | $ | 523,331 | | | $ | 1,077,747 | | | $ | (126,179) | | | 61,327,640 | | | $ | (638,486) | | | $ | 16,418 | | | $ | 853,645 | |
Cumulative adjustment from adoption of new accounting guidance | | Cumulative adjustment from adoption of new accounting guidance | — | | | — | | | — | | | (1,684) | | | 1,981 | | | — | | | — | | | — | | | 297 | |
Net earnings | | Net earnings | — | | | — | | | — | | | 95,975 | | | — | | | — | | | — | | | 5,254 | | | 101,229 | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (15,712) | | | — | | | — | | | 629 | | | (15,083) | |
Issuance of common stock under stock compensation plans including income tax effect | | Issuance of common stock under stock compensation plans including income tax effect | 1,155,166 | | | 10 | | | (8,699) | | | — | | | — | | | (994,519) | | | 11,490 | | | — | | | 2,801 | |
Issuance of stock under Employee Stock Purchase Plan | | Issuance of stock under Employee Stock Purchase Plan | 53,424 | | | 1 | | | 166 | | | — | | | — | | | (53,424) | | | 616 | | | — | | | 783 | |
Share-based compensation | | Share-based compensation | — | | | — | | | 24,079 | | | 211 | | | — | | | — | | | — | | | — | | | 24,290 | |
Dividends | | Dividends | — | | | — | | | — | | | (41,840) | | | — | | | — | | | — | | | — | | | (41,840) | |
Share repurchases | | Share repurchases | (16,739,740) | | | (167) | | | 167 | | | — | | | — | | | 16,739,740 | | | (288,067) | | | — | | | (288,067) | |
Noncontrolling interest capital distribution | | Noncontrolling interest capital distribution | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (668) | | | (668) | |
Equity component value of convertible note issuance, net | | Equity component value of convertible note issuance, net | — | | | — | | | 42,320 | | | — | | | — | | | — | | | — | | | — | | | 42,320 | |
Sale of common stock warrant | | Sale of common stock warrant | — | | | — | | | 28,080 | | | — | | | — | | | — | | | — | | | — | | | 28,080 | |
Purchase of convertible note hedge | | Purchase of convertible note hedge | — | | | — | | | (46,440) | | | — | | | — | | | — | | | — | | | — | | | (46,440) | |
Balance at February 1, 2020 | | Balance at February 1, 2020 | 65,848,510 | | | $ | 658 | | | $ | 563,004 | | | $ | 1,130,409 | | | $ | (139,910) | | | 77,019,437 | | | $ | (914,447) | | | $ | 21,633 | | | $ | 661,347 | |
| Shares | | Amount | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Shares | | Amount | | Nonredeemable Noncontrolling Interests | | Total | |
Balance at January 31, 2015 | 85,323,154 |
| | $ | 853 |
| | $ | 453,546 |
| | $ | 1,265,524 |
| | $ | (127,065 | ) | | 54,235,846 |
| | $ | (519,002 | ) | | $ | 15,590 |
| | $ | 1,089,446 |
| |
Net earnings (loss) | | Net earnings (loss) | — | | | — | | | — | | | (81,229) | | | — | | | — | | | — | | | 488 | | | (80,741) | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 19,235 | | | — | | | — | | | (204) | | | 19,031 | |
Issuance of common stock under stock compensation plans including income tax effect | | Issuance of common stock under stock compensation plans including income tax effect | 2,294,872 | | | 24 | | | (28,267) | | | — | | | — | | | (2,369,140) | | | 28,058 | | | — | | | (185) | |
Issuance of stock under Employee Stock Purchase Plan | | Issuance of stock under Employee Stock Purchase Plan | 86,780 | | | — | | | (427) | | | — | | | — | | | (86,780) | | | 1,027 | | | — | | | 600 | |
Share-based compensation | | Share-based compensation | — | | | — | | | 18,761 | | | 69 | | | — | | | — | | | — | | | — | | | 18,830 | |
Dividends | | Dividends | — | | | — | | | — | | | (14,426) | | | — | | | — | | | — | | | — | | | (14,426) | |
Share repurchases | | Share repurchases | (4,000,000) | | | (40) | | | 40 | | | — | | | — | | | 4,000,000 | | | (38,876) | | | — | | | (38,876) | |
| Balance at January 30, 2021 | | Balance at January 30, 2021 | 64,230,162 | | | $ | 642 | | | $ | 553,111 | | | $ | 1,034,823 | | | $ | (120,675) | | | 78,563,517 | | | $ | (924,238) | | | $ | 21,917 | | | $ | 565,580 | |
| Net earnings | — |
| | — |
| | — |
| | 81,851 |
| | — |
| | — |
| | — |
| | 2,964 |
| | 84,815 |
| Net earnings | — | | | — | | | — | | | 171,363 | | | — | | | — | | | — | | | 8,686 | | | 180,049 | |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (36,083 | ) | | — |
| | — |
| | (1,661 | ) | | (37,744 | ) | |
Gain on derivative financial instruments designated as cash flow hedges | — |
| | — |
| | — |
| | — |
| | 95 |
| | — |
| | — |
| | — |
| | 95 |
| |
Unrealized loss on marketable securities | — |
| | — |
| | — |
| | — |
| | (12 | ) | | — |
| | — |
| | — |
| | (12 | ) | |
Actuarial valuation gain (loss) and related amortization, plan amendment, curtailment, prior service credit amortization and foreign currency and other adjustments on defined benefit plans | — |
| | — |
| | — |
| | — |
| | 5,011 |
| | — |
| | — |
| | — |
| | 5,011 |
| |
Issuance of common stock under stock compensation plans including tax effect | 469,937 |
| | 5 |
| | (4,028 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (4,023 | ) | |
Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | (14,874) | | | — | | | — | | | (966) | | | (15,840) | |
Issuance of common stock under stock compensation plans including income tax effect | | Issuance of common stock under stock compensation plans including income tax effect | 718,018 | | | 8 | | | (9,469) | | | — | | | — | | | (739,751) | | | 8,710 | | | — | | | (751) | |
Issuance of stock under Employee Stock Purchase Plan | 40,846 |
| | — |
| | 263 |
| | — |
| | — |
| | (40,846 | ) | | 397 |
| | — |
| | 660 |
| Issuance of stock under Employee Stock Purchase Plan | 38,144 | | | — | | | 263 | | | — | | | — | | | (38,144) | | | 450 | | | — | | | 713 | |
Share-based compensation | — |
| | — |
| | 18,773 |
| | 107 |
| | — |
| | — |
| | — |
| | — |
| | 18,880 |
| Share-based compensation | — | | | — | | | 21,096 | | | 23 | | | — | | | — | | | — | | | — | | | 21,119 | |
Dividends | — |
| | — |
| | — |
| | (77,287 | ) | | — |
| | — |
| | — |
| | — |
| | (77,287 | ) | Dividends | — | | | — | | | — | | | (37,091) | | | — | | | — | | | — | | | — | | | (37,091) | |
Share repurchases | (2,000,000 | ) | | (20 | ) | | 20 |
| | — |
| | — |
| | 2,000,000 |
| | (44,053 | ) | | — |
| | (44,053 | ) | Share repurchases | (2,289,292) | | | (23) | | | 23 | | | — | | | — | | | 2,289,292 | | | (51,030) | | | — | | | (51,030) | |
Noncontrolling interest capital distribution | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,075 | ) | | (4,075 | ) | Noncontrolling interest capital distribution | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,452) | | | (3,452) | |
Redeemable noncontrolling interest redemption value adjustment | — |
| | — |
| | — |
| | (420 | ) | | — |
| | — |
| | — |
| | — |
| | (420 | ) | Redeemable noncontrolling interest redemption value adjustment | — | | | — | | | — | | | (10,454) | | | — | | | — | | | — | | | 4,800 | | | (5,654) | |
Balance at January 30, 2016 | 83,833,937 |
| | $ | 838 |
| | $ | 468,574 |
| | $ | 1,269,775 |
| | $ | (158,054 | ) | | 56,195,000 |
|
| $ | (562,658 | ) | | $ | 12,818 |
| | $ | 1,031,293 |
| |
Net earnings | — |
| | — |
| | — |
| | 22,761 |
| | — |
| | — |
| | — |
| | 2,637 |
| | 25,398 |
| |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (575 | ) | | — |
| | — |
| | (2,057 | ) | | (2,632 | ) | |
Loss on derivative financial instruments designated as cash flow hedges | — |
| | — |
| | — |
| | — |
| | (1,852 | ) | | — |
| | — |
| | — |
| | (1,852 | ) | |
Other-than-temporary-impairment and unrealized loss on marketable securities | — |
| | — |
| | — |
| | — |
| | 15 |
| | — |
| | — |
| | — |
| | 15 |
| |
Actuarial valuation loss and related amortization, prior service credit amortization and foreign currency and other adjustments on defined benefit plans | — |
| | — |
| | — |
| | — |
| | (923 | ) | | — |
| | — |
| | — |
| | (923 | ) | |
Issuance of common stock under stock compensation plans including tax effect | 481,037 |
| | 6 |
| | (3,819 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (3,813 | ) | |
Issuance of stock under Employee Stock Purchase Plan | 44,486 |
| | — |
| | 112 |
| | — |
| | — |
| | (44,486 | ) | | 446 |
| | — |
| | 558 |
| |
Share-based compensation | — |
| | — |
| | 16,698 |
| | 210 |
| | — |
| | — |
| | — |
| | — |
| | 16,908 |
| |
Dividends | — |
| | — |
| | — |
| | (76,997 | ) | | — |
| | — |
| | — |
| | — |
| | (76,997 | ) | |
Share repurchases | (289,968 | ) | | (3 | ) | | 3 |
| | — |
| | — |
| | 289,968 |
| | (3,532 | ) | | — |
| | (3,532 | ) | |
Purchase of redeemable noncontrolling interest | — |
| | — |
| | (1,133 | ) | | — |
| | — |
| | — |
| | — |
| | 1,133 |
| | — |
| |
Noncontrolling interest capital distribution | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,759 | ) | | (2,759 | ) | |
Redeemable noncontrolling interest redemption value adjustment | — |
| | — |
| | — |
| | (670 | ) | | — |
| | — |
| | — |
| | — |
| | (670 | ) | |
Balance at January 28, 2017 | 84,069,492 |
| | $ | 841 |
| | $ | 480,435 |
| | $ | 1,215,079 |
| | $ | (161,389 | ) | | 56,440,482 |
|
| $ | (565,744 | ) | | $ | 11,772 |
| | $ | 980,994 |
| |
Cumulative adjustment from adoption of new accounting guidance | — |
| | — |
| | 268 |
| | 942 |
| | (1,210 | ) | | — |
| | — |
| | — |
| | — |
| |
Net earnings (loss) | — |
| | — |
| | — |
| | (7,894 | ) | | — |
| | — |
| | — |
| | 3,993 |
| | (3,901 | ) | |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | 91,178 |
| | — |
| | — |
| | 2,238 |
| | 93,416 |
| |
Loss on derivative financial instruments designated as cash flow hedges | — |
| | — |
| | — |
| | — |
| | (19,994 | ) | | — |
| | — |
| | — |
| | (19,994 | ) | |
Actuarial valuation loss and related amortization, prior service credit amortization and foreign currency and other adjustments on defined benefit plans | — |
| | — |
| | — |
| | — |
| | (1,647 | ) | | — |
| | — |
| | — |
| | (1,647 | ) | |
Issuance of common stock under stock compensation plans including tax effect | 1,113,713 |
| | 10 |
| | (1,267 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,257 | ) | |
Issuance of stock under Employee Stock Purchase Plan | 54,300 |
| | — |
| | 17 |
| | — |
| | — |
| | (54,300 | ) | | 549 |
| | — |
| | 566 |
| |
Share-based compensation | — |
| | — |
| | 18,758 |
| | 94 |
| | — |
| | — |
| | — |
| | — |
| | 18,852 |
| |
Dividends | — |
| | — |
| | — |
| | (76,048 | ) | | — |
| | — |
| | — |
| | — |
| | (76,048 | ) | |
Share repurchases | (3,866,387 | ) | | (38 | ) | | 38 |
| | — |
| | — |
| | 3,866,387 |
| | (56,159 | ) | | — |
| | (56,159 | ) | |
Noncontrolling interest capital contribution | — |
| | — |
| | — |
| | — |
| | — |
| | | | — |
| | 11 |
| | 11 |
| |
Noncontrolling interest capital distribution | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,358 | ) | | (1,358 | ) | |
Balance at February 3, 2018 | 81,371,118 |
| | $ | 813 |
| | $ | 498,249 |
| | $ | 1,132,173 |
| | $ | (93,062 | ) | | 60,252,569 |
|
| $ | (621,354 | ) | | $ | 16,656 |
| | $ | 933,475 |
| |
Balance at January 29, 2022 | | Balance at January 29, 2022 | 62,697,032 | | | $ | 627 | | | $ | 565,024 | | | $ | 1,158,664 | | | $ | (135,549) | | | 80,074,914 | | | $ | (966,108) | | | $ | 30,985 | | | $ | 653,643 | |
See accompanying notes to consolidated financial statements.
GUESS?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | Year Ended | | Year Ended | | Year Ended | | Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 | | Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Cash flows from operating activities: | | | | | | Cash flows from operating activities: | | | | | |
Net earnings (loss) | $ | (3,901 | ) | | $ | 25,398 |
| | $ | 84,815 |
| Net earnings (loss) | $ | 180,049 | | | $ | (80,741) | | | $ | 101,229 | |
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | |
Depreciation and amortization of property and equipment | 62,083 |
| | 67,480 |
| | 68,588 |
| |
Amortization of intangible assets | 1,505 |
| | 1,839 |
| | 2,096 |
| |
Depreciation and amortization | | Depreciation and amortization | 56,799 | | | 63,501 | | | 72,188 | |
Amortization of debt discount | | Amortization of debt discount | 11,125 | | | 10,394 | | | 7,558 | |
Amortization of debt issuance costs | | Amortization of debt issuance costs | 1,390 | | | 1,351 | | | 919 | |
Share-based compensation expense | 18,852 |
| | 16,908 |
| | 18,880 |
| Share-based compensation expense | 21,119 | | | 18,830 | | | 24,290 | |
Unrealized forward contract (gains) losses | 3,087 |
| | (3,157 | ) | | (1,937 | ) | |
Forward contract (gains) losses | | Forward contract (gains) losses | (2,401) | | | 4,462 | | | (542) | |
Deferred income taxes | 23,802 |
| | 408 |
| | 723 |
| Deferred income taxes | (95,544) | | | (5,413) | | | (5,655) | |
Net (gain) loss on disposition of property and equipment and long-term assets | 6,891 |
| | 11,809 |
| | (4,255 | ) | |
Net loss on impairment and disposition of long-term assets | | Net loss on impairment and disposition of long-term assets | 5,731 | | | 82,209 | | | 11,051 | |
Other items, net | (7,832 | ) | | 3,495 |
| | 3,442 |
| Other items, net | 16,080 | | | 12,396 | | | 5,736 | |
Changes in operating assets and liabilities: | | | | | | Changes in operating assets and liabilities: | | | | | |
Accounts receivable | (11,656 | ) | | (10,805 | ) | | (5,970 | ) | Accounts receivable | (42,235) | | | 34,531 | | | (12,458) | |
Inventories | (28,120 | ) | | (57,096 | ) | | (2,179 | ) | Inventories | (91,048) | | | 17,838 | | | 65,428 | |
Prepaid expenses and other assets | (429 | ) | | (1,839 | ) | | (67 | ) | Prepaid expenses and other assets | (15,772) | | | 1,115 | | | 14,739 | |
Accounts payable and accrued expenses | 69,299 |
| | 19,054 |
| | 33,510 |
| |
Deferred rent and lease incentives | 1,221 |
| | 3,117 |
| | (3,384 | ) | |
Operating lease assets and liabilities, net | | Operating lease assets and liabilities, net | (26,891) | | | 22,751 | | | 1,802 | |
Accounts payable and accrued expenses and other current liabilities | | Accounts payable and accrued expenses and other current liabilities | 101,554 | | | 31,112 | | | (87,423) | |
Other long-term liabilities | 13,568 |
| | (4,871 | ) | | (14,594 | ) | Other long-term liabilities | 11,686 | | | (5,286) | | | (949) | |
Net cash provided by operating activities | 148,370 |
| | 71,740 |
| | 179,668 |
| Net cash provided by operating activities | 131,642 | | | 209,050 | | | 197,913 | |
Cash flows from investing activities: | | | | | | Cash flows from investing activities: | | | | | |
Purchases of property and equipment | (84,655 | ) | | (90,581 | ) | | (83,844 | ) | Purchases of property and equipment | (63,521) | | | (18,876) | | | (61,868) | |
Proceeds from sale of long-term assets | 1,052 |
| | 43,399 |
| | — |
| |
Changes in other assets | 753 |
| | — |
| | 2,614 |
| |
Acquisition of businesses, net of cash acquired | (4,850 | ) | | (2,068 | ) | | (1,330 | ) | |
Proceeds from sale of business and long-term assets | | Proceeds from sale of business and long-term assets | 3,653 | | | 2,739 | | | 4,473 | |
| Net cash settlement of forward contracts | (2,150 | ) | | 266 |
| | 9,014 |
| Net cash settlement of forward contracts | (460) | | | (1,387) | | | 162 | |
Purchases of investments | (497 | ) | | — |
| | — |
| Purchases of investments | (1,562) | | | (4,818) | | | — | |
Other investing activities | | Other investing activities | (387) | | | 181 | | | 762 | |
Net cash used in investing activities | (90,347 | ) | | (48,984 | ) | | (73,546 | ) | Net cash used in investing activities | (62,277) | | | (22,161) | | | (56,471) | |
Cash flows from financing activities: | | | | | | Cash flows from financing activities: | | | | | |
Payment of debt issuance costs | — |
| | (111 | ) | | (1,072 | ) | |
Proceeds from borrowings | 166 |
| | 21,500 |
| | 948 |
| Proceeds from borrowings | 32,169 | | | 309,105 | | | 137,282 | |
Repayment of borrowings and capital lease obligations | (1,633 | ) | | (4,747 | ) | | (1,518 | ) | |
Repayments of borrowings and finance lease obligations | | Repayments of borrowings and finance lease obligations | (37,946) | | | (264,999) | | | (135,975) | |
Proceeds from issuance of convertible senior notes | | Proceeds from issuance of convertible senior notes | — | | | — | | | 300,000 | |
Proceeds from issuance of warrants | | Proceeds from issuance of warrants | — | | | — | | | 28,080 | |
Purchase of convertible note hedges | | Purchase of convertible note hedges | — | | | — | | | (60,990) | |
Convertible debt issuance costs | | Convertible debt issuance costs | — | | | — | | | (5,276) | |
| Dividends paid | (76,057 | ) | | (76,503 | ) | | (76,860 | ) | Dividends paid | (36,747) | | | (15,552) | | | (42,135) | |
Purchase of redeemable noncontrolling interest | — |
| | (4,445 | ) | | — |
| |
Noncontrolling interest capital contribution | 962 |
| | 2,157 |
| | 871 |
| |
| Noncontrolling interest capital distribution | (1,358 | ) | | (2,759 | ) | | (4,075 | ) | Noncontrolling interest capital distribution | (3,452) | | | — | | | (668) | |
Issuance of common stock, net of tax withholdings on vesting of stock awards | (690 | ) | | (594 | ) | | (2,220 | ) | |
Issuance of common stock, net of income tax withholdings on vesting of stock awards | | Issuance of common stock, net of income tax withholdings on vesting of stock awards | (38) | | | 415 | | | 3,584 | |
Purchase of treasury stock | (50,127 | ) | | (3,532 | ) | | (44,053 | ) | Purchase of treasury stock | (51,030) | | | (38,876) | | | (288,067) | |
Net cash used in financing activities | (128,737 | ) | | (69,034 | ) | | (127,979 | ) | Net cash used in financing activities | (97,044) | | | (9,907) | | | (64,165) | |
Effect of exchange rates on cash, cash equivalents and restricted cash | 40,746 |
| | (2,071 | ) | | (15,964 | ) | Effect of exchange rates on cash, cash equivalents and restricted cash | (26,101) | | | 7,535 | | | (3,444) | |
Net change in cash, cash equivalents and restricted cash | (29,968 | ) | | (48,349 | ) | | (37,821 | ) | Net change in cash, cash equivalents and restricted cash | (53,780) | | | 184,517 | | | 73,833 | |
Cash, cash equivalents and restricted cash at the beginning of the year | 397,650 |
| | 445,999 |
| | 483,820 |
| Cash, cash equivalents and restricted cash at the beginning of the year | 469,345 | | | 284,828 | | | 210,995 | |
Cash, cash equivalents and restricted cash at the end of the year | $ | 367,682 |
| | $ | 397,650 |
| | $ | 445,999 |
| Cash, cash equivalents and restricted cash at the end of the year | $ | 415,565 | | | $ | 469,345 | | | $ | 284,828 | |
| | | | | | | | | | | |
Supplemental cash flow data: | | | | | | Supplemental cash flow data: | | | | | |
Interest paid | $ | 2,078 |
| | $ | 1,225 |
| | $ | 868 |
| Interest paid | $ | 10,069 | | | $ | 11,925 | | | $ | 5,248 | |
Income taxes paid | $ | 26,907 |
| | $ | 24,869 |
| | $ | 31,188 |
| |
Income taxes paid, net of refunds | | Income taxes paid, net of refunds | $ | 152,693 | | | $ | 7,697 | | | $ | 15,112 | |
| | | | | | |
Non-cash investing and financing activity: | | | | | | Non-cash investing and financing activity: | |
Assets acquired under capital lease obligations | $ | 18,502 |
| | $ | — |
| | $ | — |
| |
Change in accrual of property and equipment | | Change in accrual of property and equipment | $ | 9,826 | | | $ | (365) | | | $ | (2,634) | |
Assets acquired under finance lease obligations | | Assets acquired under finance lease obligations | $ | 8,447 | | | $ | 7,131 | | | $ | 3,070 | |
Receivable (payable) and related adjustments from sale of retail locations | | Receivable (payable) and related adjustments from sale of retail locations | $ | — | | | $ | (510) | | | $ | 3,558 | |
See accompanying notes to consolidated financial statements.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)(1) Description of the Business and Summary of Significant Accounting Policies and Practices
Description of the Business
Guess?, Inc. (the “Company” or “GUESS?”) designs, markets, distributes and licenses a leading lifestyle collection of contemporary apparel and accessories for men, women and children that reflect the American lifestyle and European fashion sensibilities. The Company’s designs are sold in GUESS? owned stores, to a network of wholesale accounts that includes better department stores, selected specialty retailers and upscale boutiques and through the Internet. GUESS? branded products, some of which are produced under license, are also sold internationally through a series of retail store licensees and wholesale distributors.
Correction of Immaterial Error
During the year ended February 3, 2018, the Company identified an immaterial error related to the classification of net royalties received on the Company’s purchases of licensed product. The Company’s typical license agreement requires the licensee to pay the Company a royalty based on the licensee’s net sales of licensed products, which in certain cases also includes licensed inventory that was purchased by the Company. Historically, the Company has included royalties received on the Company’s purchases of licensed product in net royalties generated from its Licensing segment. However, in connection with the Company’s review of the new revenue recognition standard, it was determined that such royalties received should be recorded as a reduction of the cost of the licensed product under existing revenue recognition guidance. As a result, during the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales. Accordingly, prior period amounts related to net royalties, net revenue and cost of product sales have been adjusted to conform to the current period presentation. This resulted in a decrease to net revenue and cost of product sales of $18.9 million and $19.8 million for fiscal 2017 and fiscal 2016, respectively. This reclassification had no impact on previously reported earnings (loss) from operations, net earnings (loss) or net earnings (loss) per share.
Reclassifications
The Company has made certain reclassifications to prior period amounts to conform to the current period presentation within the accompanying notes to the consolidated financial statements.
Fiscal Year
The Company operates on a 52/53-week52-week fiscal year calendar, which ends on the Saturday nearest to January 31 of each year. All references herein to “fiscal 2018,2022,” “fiscal 2017”2021” and “fiscal 2016”2020” represent the results of the 53-week fiscal year ended February 3, 2018 and the 52-week52-week fiscal years ended January 28, 2017 and 29, 2022, January 30, 2016. The additional week in fiscal 2018 occurred during the fourth quarter ended2021 and February 3, 2018.1, 2020. References to “fiscal 2019”2023” represent the 52-week fiscal year ending February 2, 2019.January 28, 2023.
Principles of Consolidation
The consolidated financial statements include the accounts of Guess?, Inc., its wholly-owned direct and indirect subsidiaries and its non-wholly-owned subsidiaries and joint ventures in which the Company has a controlling financial interest and is determined to be the primary beneficiary. Accordingly, all references herein to “Guess?, Inc.” include the consolidated results of the Company, its wholly-owned subsidiaries and its joint ventures. All intercompany accounts and transactions are eliminated during the consolidation process.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosed in the accompanying notes. Significant areas requiring the use of management estimates relate to the allowances for doubtful accounts, sales return and markdown allowances, gift card and loyalty accruals, valuation of inventories, share-based compensation, recoverability of deferred taxes, unrecognized tax benefits, the useful life of assets for depreciation and amortization, evaluation of asset impairment (including goodwill and long-lived assets, such as property and equipment and operating lease right-of-use (“ROU”) assets), pension obligations, workers’ compensation and medical self-insurance expense and accruals, litigation reserves and restructuring expense and accruals. Actual results could differ from those estimates. Revisions in estimates could materially impact the results of operations and financial position.
As discussed further below, the coronavirus (or “COVID-19”) pandemic has impacted the Company’s results during the fiscal year ended January 29, 2022. The Company’s operations could continue to be impacted in ways the Company is not able to predict today due to the evolving situation. While the Company believes it has made reasonable accounting estimates based on the facts and circumstances that were available as of the reporting date, to the extent there are differences between these estimates and actual results, the Company’s results of operations and financial position could be materially impacted.
COVID-19 Business Update
The COVID-19 pandemic is continuing to negatively impact the Company’s businesses. In late fiscal 2021, the Company incurred a new round of government-mandated temporary store closures, mostly in Europe. The number of temporary store closures ebbed and flowed during the first quarter of fiscal 2022 based on local conditions. During the second quarter of fiscal 2022, the Company gradually opened its stores closed at the end of
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
fiscal 2021 due to COVID-19 restrictions. As of January 29, 2022 and March 21, 2022, almost all of its directly operated stores were opened. The Company’s e-commerce sites have remained open in all regions throughout the pandemic. In addition to the impact of store closures, retail stores that are open have remained challenged by lower traffic and capacity restrictions. Many of the Company’s wholesale and licensing partners have also substantially reduced their operations.
The COVID-19 crisis has also contributed to disruptions in the overall global supply chain, leading to industry-wide product delays and higher freight costs. The Company has been working actively to mitigate these headwinds to the extent possible through a number of global supply chain initiatives.
In light of the fluid nature of the pandemic, the Company continues to carefully monitor global and regional developments, such as the recent spread of the Omicron variant, and respond appropriately. The Company also continues to strategically manage expenses in order to protect profitability and to mitigate, to the extent possible, the effect of the supply chain disruptions. During fiscal 2021 and 2020, the Company suspended rental payments and/or paid reduced rental amounts with respect to its retail stores that were closed or were experiencing drastically reduced customer traffic as a result of the COVID-19 pandemic. The Company has successfully negotiated with several landlords, including some of its larger landlords and has received rent abatement benefits. The Company continues to engage in discussions with additional affected landlords in an effort to achieve appropriate rent relief and other lease concessions and, in some cases, to terminate existing leases. Consistent with updated guidance from the Financial Accounting Standards Board (“FASB”) in April 2020, the Company has elected to treat any such agreed-upon payment deferrals related to the COVID-19 pandemic as if there were no modifications to the lease contract and has accrued such amounts within the current portion of operating lease liabilities in the Company’s consolidated balance sheet. The Company has elected to treat other rent concessions which result in reduced lease payments as variable lease payments if the concessions that are provided are for a period of generally less than 12 months. For any rent concessions which reduce the lease payments for a period of generally more than 12 months or change the payment terms from minimum rental amounts to amounts based on a percentage of sales volume for the remainder of the lease term, the Company has elected to treat such changes as lease modifications under the current lease guidance.
Business Segment Reporting
Where applicable, the Company reports information about business segments and related disclosures about products and services, geographic areas and major customers. The Company’s businesses are grouped into five5 reportable segments for management and internal financial reporting purposes: Americas Retail, Americas Wholesale, Europe, Asia and Licensing. The Company’s Americas Retail, Americas Wholesale, Europe and Licensing reportable segments are the same as their respective operating segments. Certain components of the Company’s Asia reportable segment are separate operating segments based on regionregions, which have been aggregated into the Asia reportable segment for disclosure purposes. During fiscal 2018, net revenue and related costs and expenses for certain globally serviced customers were reclassified into the segment primarily responsible for the relationship. During fiscal 2018, segment results were also adjusted to exclude corporate performance-based compensation costs, net gains (losses) on lease terminations and asset impairment charges due to the fact that these items are no longer included in the segment results provided to the Company’s chief operating decision maker in order to allocate resources and assess performance. Accordingly, segment results have been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation. Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, asset impairment charges, net gains (losses) from lease terminations, asset impairmentmodifications, restructuring charges and restructuring charges,certain non-recurring credits (charges), if any. The Company believes this segment reporting reflects how its business segments are managed and how each segment’s performance is evaluated by the Company’s chief operating decision maker to assess performance and make resource allocation decisions. The Americas Retail segment includes the Company’s retail and e-commerce operations in North and Central America and its retail operations in South America.the Americas. The Americas Wholesale segment includes the Company’s wholesale operations in the Americas. The Europe segment includes the Company’s retail, e-commerce and wholesale operations in Europe and the Middle East. The Asia segment includes the Company’s retail, e-commerce and wholesale operations in Asia and the Pacific. The Licensing segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, asset impairment charges, net gains (losses) on lease terminations, asset impairmentmodifications, restructuring charges and restructuring charges.certain non-recurring credits (charges), if any. Corporate overhead costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, corporate performance-based compensation, facilities, global advertising and marketing, human resources, information technology and legal. Information regarding these segments is summarized in Note 17.18.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
GeneralProducts Transferred at a Point in Time
The Company recognizes the majority of its revenue from its direct-to-consumer (brick-and-mortar retail operationsstores and concessions as well as e-commerce) and wholesale distribution channels at a point in time when it satisfies a performance obligation and transfers control of the product to the respective customer. For the Company’s brick-and-mortar retail stores and concessions, revenue is typically recognized at the point of sale and wholesale operations revenueincludes estimates of variable consideration such as allowances for sales returns and loyalty award obligations, where applicable. Revenue generated from the sale ofCompany’s e-commerce sites is recognized when merchandise is transferred to a common carrier. Revenue generated from the Company’s wholesale distribution channel is recognized when products are shipped andcontrol transfers to the customer, takes title and assumes riskwhich generally occurs upon shipment. The amount of loss, collection of the relevant receivablerevenue that is reasonably assured, pervasive evidence of an arrangement exists, and the sales pricerecognized is fixed or determinable. Revenue from our e-commerce operations, including shipping fees, is recognized based on the transaction price, which represents the invoiced amount and includes estimates of variable consideration such as allowances for sales returns and markdowns, where applicable. The amount of variable consideration included in the transaction price may be constrained and is included only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period.
The Company accepts payments at its brick-and-mortar retail locations and its e-commerce sites in the form of cash, credit cards, gift cards and loyalty points, where applicable. Payment terms, typically less than one year, are offered to the Company’s wholesale customers and do not include a significant financing component. The Company extends credit to wholesale customers based upon an evaluation of the customer’s financial condition and credit history and generally requires no collateral but does obtain credit insurance when considered appropriate. As of January 29, 2022, approximately 50% of the Company’s total net trade accounts receivable and 64% of its European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. The Company’s credit insurance coverage contains certain terms and conditions specifying deductibles and annual claim limits. During fiscal 2021, the Company adopted authoritative guidance related to the measurement of credit losses on financial instruments. This guidance replaces the “as incurred” loss model with an “expected loss” model which requires the recognition of an allowance for credit losses expected to be incurred over an asset’s lifetime. The adoption of this guidance did not have a material impact on the Company’s allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses that result from the inability of its wholesale customers to make their required payments. The Company bases its allowances on analysis of the aging of accounts receivable at the date of the financial statements, assessments of historical and current collection trends, an evaluation of the impact of current economic conditions and whether the Company has obtained credit insurance or other guarantees which are not considered freestanding against the related account receivable balances. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based on these evaluations. The Company’s credit losses for the periods presented were not significant compared to sales and did not significantly exceed management’s estimates. Refer to Note 3 for further information regarding the Company’s allowance for doubtful accounts.
Shipping and handling costs associated with outbound freight incurred to transfer a product to a customer receipt date. are accounted for as fulfillment costs and are included in SG&A expenses. Sales and usage-based taxes collected from customers and remitted directly to governmental authorities are excluded from net revenues.
The Company does not have significant contract balances related to its direct-to-consumer or wholesale distribution channels other than the allowance for sales returns and markdowns as well as liabilities related to its gift cards and loyalty programs, which are included in accrued expenses. The Company also does not have significant contract acquisition costs related to its direct-to-consumer or wholesale distribution channels.
Sales Return Allowances
The Company accrues for estimated sales returns and other allowances in the period in which the related revenue is recognized. To recognize the financial impact of sales returns, the Company estimates the amount of goods that will be returned based on historical experience and current trends and reduces sales and cost of sales accordingly. Sales taxes and value added taxes collected fromaccordingly. The Company’s policy allows retail customers and remitted directlyin certain regions a grace period to governmental authorities are excluded from net revenues.
Net Royalty Revenue
Royalty revenue is based upon a percentage, as defined inreturn merchandise following the underlying agreement, of the licensee’s actual net sales or minimum net sales, whichever is greater. The Company may also receive special payments in consideration of the grant of license rights. These payments are recognized ratably as revenue over the term of the license agreement. The unrecognized portion of upfront payments is included in deferred royalties in accrued expenses and other long-term liabilities depending on the short or long-term nature of the payments to be recognized. As of February 3, 2018, the Company had $6.8 million and $12.8 million of deferred royalties included in accrued expenses and other long-term liabilities, respectively. This compares to $6.1 million and $16.4 million of deferred royalties included in accrued expenses and other long-term liabilities, respectively, at January 28, 2017.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
date of sale. Substantially all of these returns are considered to be resalable at a price that exceeds the cost of the merchandise. The Company includes the allowance for sales returns in accrued expenses and the estimated cost associated with such sales returns within other current assets in its consolidated balance sheet. As of January 29, 2022, the Company included $38.4 million in accrued expenses related to the allowance for sales returns and $14.5 million in other current assets related to the estimated cost of such sales returns. As of January 30, 2021, the Company included $27.2 million in accrued expenses related to the allowance for sales returns and $10.0 million in other current assets related to the estimated cost of such sales returns.
Markdown Allowances
Costs associated with customer markdowns are recorded as a reduction to revenues and any amounts unapplied to existing receivables are included in accrued expenses. Historically, these markdown allowances resulted from seasonal negotiations with the Company’s wholesale customers, as well as historical trends and the evaluation of the impact of current economic conditions. The Company included $19.0 million and $16.2 million in accrued expenses related to the allowance for markdowns as of January 29, 2022 and January 30, 2021, respectively.
Gift Cards
Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by the Company for which a liability was recorded in prior periods. Gifts cards are mainly used in the U.S. and Canada. The Company issues its gift cards in the U.S. and Canada through one1 of its subsidiaries and is not required by law to escheat the value of unredeemed gift cards to the state in which the subsidiary is domiciled. Estimated breakage amounts are accounted for under the redemption recognition method and are classified as additional net revenues as the gift cards are redeemed. The Company’s gift card breakage rate is approximately 6.1%7.6% and 5.1%7.4% for the U.S. retail business and Canadian retail business, respectively, based upon historical redemption patterns, which represents the cumulative estimated amount of gift card breakage from the inception of the electronic gift card program in late 2002. Based upon historical redemption trends, the Company recognizes estimated gift card breakage as a component of net revenue in proportion to actual gift card redemptions, over the period that remaining gift card values are redeemed. In fiscal 2018, fiscal 2017 and fiscal 2016, the Company recognized $0.7 million, $0.8 million and $0.5 million of gift card breakage to revenue, respectively. Any future revisions to the estimated breakage rate may result in changes in the amount of breakage income recognized in future periods. In fiscal 2022, fiscal 2021 and fiscal 2020, the Company recognized $1.0 million, $0.4 million and $1.3 million of gift card breakage to revenue, respectively. The Company included $4.4 million and $4.5 million in accrued expenses related to its gift card liability for each of the fiscal years ended January 29, 2022 and January 30, 2021.
Loyalty Programs
The Company has customer loyalty programs in North America, Europe and Asia which cover all of its brands. Under certain of the programs, primarily in the U.S. and Canada, customers accumulate points based on purchase activity. Once a loyalty program member achieves a certain point level, the member earns awards that may only be redeemed for merchandise. Unredeemed points generally expire after six months without additional purchase activity and unredeemed awards generally expire after two months. TheWhere applicable, the Company usesallocates a portion of the transaction price from sales in its direct-to-consumer channel to its loyalty program by using historical redemption rates to estimate the value of future award redemptions which areredemptions. This amount is accrued in current liabilities and recorded as a reduction of net revenue in the period which the related revenue is recognized. During fiscal 2022, fiscal 2021 and fiscal 2020, activity related to the Company’s loyalty programs increased (decreased) net revenue by $(0.6) million, $0.4 million and $(0.1) million, respectively. The aggregate dollar value of the loyalty program accruals included in accrued expenses was $3.8$6.0 million and$4.0 $5.4 million as of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, respectively. Future revisions to the estimated liability may result in changes to net revenue.revenue.
Intellectual Property Transferred Over Time
The Company’s trademark license agreements represent symbolic licenses that are dependent on the Company’s continued support over the term of the license agreement. The revenue recognized from the licensing
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
arrangements is based on sales-based royalty and advertising fund contributions, as well as specific fixed payments, where applicable.
The typical license agreement requires that the licensee pay the Company the greater of a royalty based on a percentage of the licensee’s net sales of licensed products or a guaranteed annual minimum royalty that typically increases over the term of the license agreement. Generally, licensees are also required to make contributions to advertising funds, as a percentage of their sales, or may elect to increase their contribution to support specific brand-building initiatives. The Company recognizes revenue from sales-based royalty and advertising fund contributions when the related sales occur, which is consistent with the timing of when the performance obligation is satisfied. The Company records advertising contributions received from its licensees and the related advertising expenditures incurred by the Company on a gross basis in its consolidated statements of income (loss). The Company records royalty and advertising payments received on the Company’s purchases of licensed product as a reduction of the cost of the licensed product.
The Company’s trademark license agreements customarily provide for a multi-year initial term generally ranging from three to ten years, and may contain options to renew prior to expiration for an additional multi-year period. Several of the Company’s key license agreements provide for specified, fixed cash rights payments over and above our normal, ongoing royalty payments in consideration of the grant of the license rights. These payments are recognized ratably as revenue over the term of the license agreement and do not include a significant financing component. The unrecognized portion of upfront payments is included in deferred royalties in accrued expenses and other long-term liabilities depending on the short or long-term nature of the payments to be recognized. As of January 29, 2022, the Company had $5.1 million and $14.3 million of deferred royalties included in accrued expenses and other long-term liabilities, respectively. This compares to $6.6 million and $17.1 million of deferred royalties included in accrued expenses and other long-term liabilities, respectively, at January 30, 2021. In fiscal 2022, fiscal 2021 and fiscal 2020, the Company recognized $14.0 million, $13.0 million and $12.3 million in net royalties related to the amortization of the deferred royalties, respectively.
Contract balances related to the Company’s licensing distribution channel consist primarily of royalty receivables and liabilities related to deferred royalties. Refer to Note 3 for further information on royalty receivables. The Company does not have significant contract acquisition costs related to its licensing operations.
Information regarding the intellectual property transfer is summarized in Note 12. Refer to Note 18 for further information on disaggregation of revenue by segment and country.
Classification of Certain Costs and Expenses
The Company includes inbound freight charges, purchasing costs and related overhead, retail store occupancy costs, including rentlease costs and depreciation and amortization, and a portion of the Company’s distribution costs related to its direct-to-consumer business in cost of product sales. Distribution costs related primarily to the wholesale business are included in selling, general and administrative (“SG&A”)&A expenses and amounted to $34.2$60.2 million,, $22.6 $51.0 million and $23.2$58.2 million for fiscal 2018,2022, fiscal 20172021 and fiscal 2016,2020, respectively. The Company also includes store selling, selling and merchandising, advertising, design and other corporate overhead costs as a component of SG&A expenses.
The Company classifies amounts billed to customers for shipping fees as revenues and classifies costs related to shipping as cost of product sales in the accompanying consolidated statements of income (loss).
Advertising and Marketing Costs
The Company expenses the cost of advertising as incurred. Advertising and marketing expenses charged to operations for fiscal 2018,2022, fiscal 20172021 and fiscal 20162020 were $36.3$48.5 million,, $37.1 $39.0 million and $31.6$56.5 million,, respectively.
Share-Based Compensation
The Company recognizes compensation expense for all share-based awards granted based on the grant date fair value. The fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model and involves several assumptions, including the risk-free interest rate, expected volatility, dividend
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
yield and expected life. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected stock price volatility is determined based on an average of both historical volatility and implied volatility. Implied volatility is derived from exchange traded options on the Company’s common stock.The expected dividend yield is based on the Company’s history and expectations of dividend payouts. The expected life is determined based on historical trends. Compensation expense for nonvested stock options and stock awards/units that are not subject to performance-based vesting conditions is recognized on a straight-line basis over
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the vesting period. During fiscal 2018, theThe Company adopted authoritative guidance which eliminates the requirement to estimate forfeitures, but rather provides for an election that would allow entitieshas elected to account for forfeitures as they occur.
In addition, the Company has granted certain nonvested units that require certain minimum performance targets to be achieved in order for these awards to vest. Vesting is also subject to continued service requirements through the vesting date. Compensation expense for performance-based awards that vest in increments is recognized based on an accelerated attribution method. If the minimum performance targets are not forecasted to be achieved, no expense is recognized during the period.
The Company has also granted certain nonvested stock units which are subject to market-based performance targets in order for these units to vest. Vesting is also subject to continued service requirements through the vesting date. The grant date fair value for such nonvested stock units was estimated using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the performance period. Compensation expense for such nonvested stock units is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied.
During fiscal 2016, the Company granted certainCertain restricted stock units which vestedvest immediately but wereare considered contingently returnable as a result of certain service conditions. Compensation expense for these restricted stock units wasare recognized on a straight-line basis over the implied service period.
Foreign Currency
Foreign Currency Translation Adjustment
The local selling currency is typically the functional currency for all of the Company’s significant international operations. In accordance with authoritative guidance, assets and liabilities of the Company’s foreign operations are translated from foreign currencies into U.S. dollars at period-end rates, while income and expenses are translated at the weighted average exchange rates for the period. The related translation adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive income (loss) within stockholders’ equity. In addition, the Company records foreign currency translation adjustments related to its noncontrolling interests within stockholders’ equity. Periodically, the Company may also use foreign exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries (see below). Changes in the fair values of these foreign exchange currency contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity. The total foreign currency translation adjustment increaseddecreased stockholders’ equity (including amounts attributable to nonredeemable noncontrolling interests) by $93.4$30.9 million, from an accumulated foreign currency translation loss of $164.7$110.0 million as of January 28, 201730, 2021 to an accumulated foreign currency translation loss of $71.3$140.9 million as of February 3, 2018.January 29, 2022.
Foreign Currency Transaction Gains and Losses
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, including gains and losses on foreign exchange currency contracts (see below), are included in the consolidated statements of income (loss). Net foreign currency transaction gains (losses) included in the determination of net earnings (loss) were $(5.9)$(32.1) million, $3.6$(1.7) million and $10.0$4.7 million for fiscal 2018,2022, fiscal 20172021 and fiscal 2016,2020, respectively.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivatives
Foreign Exchange Currency Contracts
The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations.Various transactions that occur primarily in Europe, Canada, South Korea, China, Hong Kong, and Mexico are denominated in U.S. dollars, British pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar denominateddollar-denominated purchases of merchandise and U.S. dollardollar- and British pound denominatedpound-denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. Further, there are certain real estate leases which are denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). As a result, the Company may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end. The Company has entered into certain forward exchange currency contracts to hedge the risk of a portion of these anticipated foreign currency transactions against foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges. The Company does not hedge all transactions denominated in foreign currency. The Company may also hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries.
Changes in the fair value of the U.S. dollar/euro and U.S. dollar/Canadian dollar forward contracts for anticipated U.S. dollar merchandise purchases designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold. Changes in the fair value of U.S. dollar/euro forward contracts for U.S. dollar intercompany royalties designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in other income and expense in the period in which the royalty expense is incurred. Changes in the fair value of any U.S. dollar/eurodollar forward contracts designated as net investment hedges are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in earnings (loss) until the sale or liquidation of the hedged net investment.
The Company also has forward exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of forward exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense.(expense).
Interest Rate Swap Agreements
The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt. Periodically, the Company may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense.(expense).
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred income tax assets and liabilities are measured using enacted income tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income taxes of a change in income tax rates is recognized in incomeearnings in the period that
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includes the enactment date. A valuation allowance is recorded when management believes it is more likely than not that the results of operations will not generate sufficient taxable earnings to realize certain net deferred income tax assets.
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The Company accounts for uncertainty in income taxes in accordance with authoritative guidance, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of aan income tax position taken or expected to be taken in aan income tax return. The Company also follows authoritative guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company is subject to an income tax on global intangible low-taxed income (“GILTI”). GILTI is an income tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Companies subject to GILTI have the option to account for the income tax as a period cost if and when incurred, or factor such amounts into the measurement of deferred income taxes. The Company has elected to account for GILTI as a period cost.
Earnings (Loss) Per Share
Basic earnings (loss) per share represents net earnings (loss) attributable to common stockholders divided by the weighted average number of common shares outstanding during the period. The Company considers any restricted stock units with forfeitable dividend rights that are issued and outstanding, but considered contingently returnable if certain service conditions are not met, as common equivalent shares outstanding. These restricted stock units are excluded from the weighted average number of common shares outstanding and basic earnings (loss) per share calculation until the respective service conditions have been met. Diluted earnings per share represents net earnings attributable to common stockholders divided by the weighted average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. period, and the dilutive impact of the Company’s convertible senior notes and related warrants, as applicable.
The Company expects to settle the principal amount of its outstanding convertible senior notes in cash and any excess in shares. As a result, upon conversion of the convertible senior notes, only the amounts in excess of the principal amount are considered in diluted earnings per share under the treasury stock method, if applicable. Refer to Note 10 for further information on the Company’s convertible senior notes.
In periods when there is a net loss, the potentially dilutive impact of common equivalent shares outstanding areis not included in the computation of diluted net loss per share as the impact of the shares would be antidilutive due to the net loss incurred for the period.antidilutive. Nonvested restricted stock awards (referred to as participating securities) are excluded from the dilutive impact of common equivalent shares outstanding in accordance with authoritative guidance under the two-class method since the nonvested restricted stockholders are entitled to participate in dividends declared on common stock as if the shares were fully vested and hence are deemed to be participating securities. Under the two-class method, distributed and undistributed earnings attributable to nonvested restricted stockholders are excluded from net earnings (loss) attributable to common stockholders for purposes of calculating basic and diluted earnings (loss) per common share. However, net losses are not allocated to nonvested restricted stockholders because they are not contractually obligated to share in the losses of the Company.
In addition, the Company has granted certain nonvested stock units that are subject to certain performance-based or market-based vesting conditions as well as continued service requirements through the respective vesting periods. These nonvested stock units are included in the computation of diluted net earnings per common share attributable to common stockholders only to the extent that the underlying performance-based or market-based vesting conditions are satisfied as of the end of the reporting period, or would be considered satisfied if the end of the reporting period were the end of the related contingency period, and the results would be dilutive under the treasury stock method.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net earnings (loss), foreign currency translation adjustments, the effective portion of the change in the fair value of cash flow hedges unrealized and realized gains or losses and other-than-temporary-impairment on available-for-sale securities and defined benefit plan impact from actuarial valuation gains or losses and related amortization, plan amendment, prior service credit or cost amortization and
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curtailment. Comprehensive income (loss) is presented in the consolidated statements of comprehensive income.income (loss).
Cash, and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less. The Company’s restricted cash is generally held as collateral for certain transactions.
Investment Securities
The Company accountsInvestments in equity securities with a readily determinable fair value, not accounted for its investment securities in accordance with authoritative guidance which requires investments to be classified into one of three categories based on management’s intent: held-to-maturity securities, available-for-sale securities and trading securities. Held-to-maturity securities are recorded at their amortized cost. Available-for-sale securitiesunder the equity-method or consolidation accounting, are recorded at fair value with unrealized gains and losses reportedincluded in other income (expense) in the Company’s consolidated statements of income (loss). The Company also has an investment in a private equity fund. The Company uses net asset value per share as a separate componentpractical expedient to measure the fair value of stockholders’ equity. Tradingthis investment.
Investments in equity securities are recorded at market value with unrealized gains and losses reported in net earnings. The appropriate classification of investment securities is determined at the time of purchase and reevaluated at each balance sheet date. The Company has historically accounted for its investment securities,under the equity-method if any, as available-for-sale.
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Thethe Company periodically evaluates investment securities for other-than-temporary-impairment using both qualitative and quantitative criteria such asis able to exercise significant influence, but not control, over the length of time and extent to which fair value has been below cost basis,investee. Equity method investments are included in other assets in the financial condition of the issuerCompany’s consolidated balance sheets and the Company’s ability and intent to hold the investment for a periodproportionate share of time which may be sufficient for anticipated recovery in market value. Other-than-temporary-impairment is recognized in net earnings (loss) as part ofare recorded in other income (expense) in the Company’s consolidated statements of income (loss). The Company will periodically evaluate its equity-method investments for impairment and record such amounts in other (income) expense in the period whichthat the unrealized losses are deemed other than temporary.carrying value of the investment before our share of earnings (loss) is determined to not be recoverable. During fiscal 2017,2019, the Company determined thatinvested $8.3 million in a privately-held apparel company in exchange for a 30% minority interest. During fiscal 2021, the Company invested a net additional $2.3 million and increased its available-for-sale securities were fully impairedminority interest from 30% to 30.5%. The Company’s ownership in this company is accounted for under the equity method of accounting. Additionally, the Company purchased a 30% interest in a privately-held men’s footwear company for approximately $0.9 million during fiscal 2021. The Company’s ownership in this company is treated under the equity method of accounting. Refer to Note 14 for more information on this investment. The Company recognized its proportionate share of net losses of $0.1 million and recognized minimal other-than-temporary-impairment$4.7 million in other expense.income (expense) in its consolidated statements of income (loss) during fiscal 2022 and 2021, respectively.
ConcentrationCurrently, the Company does not have any debt security investments.
Concentrations of Credit, Sourcing and Liquidity Risk
Cash used primarily for working capital purposes is maintained with various major financial institutions. The Company performs evaluations of the relative credit standing of these financial institutions in order to limit the amount of asset and liquidity exposure with any institution. Excess cash and cash equivalents, which represent the majority of the Company’s outstanding cash and cash equivalents balance, are held primarily in overnight deposit and short-term time deposit accounts and money market accounts.
The Company is also exposed to concentrations of credit risk through its accounts receivable balances. The Company extends credit to corporatewholesale customers based upon an evaluation of the customer’s financial condition and credit history and generally requires no collateral but does obtain credit insurance when considered appropriate. As of February 3, 2018, approximately 59% of the Company’s total net trade accounts receivable and 72% of its European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. The Company’s credit insurance coverage contains certain terms and conditions specifying deductibles and annual claim limits. The Company maintains allowances for doubtful accounts for estimated losses that result from the inability of its wholesale customers to make their required payments. The Company bases its allowances on analysis of the aging of accounts receivable at the date of the financial statements, assessments of historical collection trends, an evaluation of the impact of current economic conditions and whether the Company has obtained credit insurance or other guarantees. The Company’s corporate customers are principally located throughout Europe, Asia and the Americas. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based on these evaluations. The Company’s credit losses for the periods presented were immaterial and did not significantly exceed management’s estimates. The Company’s two largest wholesale customers accounted for a total of approximately 2.2%3.9%, 2.7%3.4% and 3.4%2.7% of the Company’s consolidated net revenue in fiscal 2018,2022, fiscal 20172021 and fiscal 20162020, respectively.
The majority of the Company’s finished goods are sourced from partners and suppliers located in over 30 countries outside the U.S. In fiscal 2022, over one third of these products were sourced from partners and suppliers based in China. The Company’s two largest suppliers, which were the Company’s licensee partners, accounted for approximately 20%, 27% and 25% of the Company’s purchases of finished goods in fiscal 2022, fiscal 2021 and fiscal 2020, respectively.
Inventories
Inventories are valued at the lower of cost (primarily weighted average method) or net realizable value. The Company continually evaluates its inventories by assessing slow moving product as well as prior seasons’
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inventory. Net realizable value of aged inventory is estimated based on historical sales trends for each product line category, the impact of market trends, an evaluation of economic conditions, available liquidation channels and the value of current orders relating to the future sales of this type of inventory.
Depreciation and Amortization
Depreciation and amortization of property and equipment and purchased intangibles are provided using the straight-line method over the following useful lives:
|
| | | | |
Building and building improvements | 10 to 39 years |
Land improvements | 5 years |
Furniture, fixtures and equipment | 2 to 10 years |
Purchased intangibles | 4 to 20 years |
Leasehold improvements are capitalized at cost and amortized over the lesser of the estimated useful life of the asset or the term of the lease, including reasonably assured renewal periods.lease. Construction in progress is not depreciated until the related asset is completed and placed in service.
Leases
The Company determines whether an arrangement is a lease at inception of the agreement and reassesses that conclusion if the agreement is modified. The term of the Company’s leases represents the non-cancelable period of the lease, including any rent-free periods and any options to renew, extend or terminate the lease that the Company is reasonably certain to exercise. The Company determines the term of each lease at lease commencement and revisits that term in subsequent periods if a triggering event occurs which would require reassessment.
Leases with an initial contractual term in excess of 12 months are accounted for as either an operating or finance lease based on certain criteria. The Company has elected to recognize leases with an initial term of 12 months or less on a straight-line basis without recognizing a right-of-use (“ROU”) asset or operating lease liability.
The Company’s lease agreements primarily provide for lease payments based on a minimum annual rental amount, a percentage of annual sales volume, periodic adjustments related to inflation or a combination of such lease payments. Some of the lease agreements require the Company to make periodic payments for insurance, property taxes, sales promotion, common area maintenance and certain utility charges. The Company has elected the practical expedient to not separate non-lease components from lease components in the measurement of liabilities for its directly-operated real estate leases. Certain of our leases may also include lease incentives such as free rent periods or construction allowances. Lease liabilities are recognized at the present value of the fixed lease payments, reduced by landlord incentives, using the Company’s incremental borrowing rate (“IBR”). Due to our centralized treasury function, the Company uses a portfolio approach to discount our lease obligations. The IBR for each lease is based primarily on borrowing rates available to the Company, which incorporates publicly-available information for other companies within the same industry and with similar credit profiles. The rate is then adjusted for the impact from collateralization, the lease term, foreign currency (if applicable) and other specific terms included in the Company’s lease arrangements.
Lease ROU assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases which includes initial investments in the form of key money to secure prime store locations. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable lease liability or lease ROU asset. Lease ROU assets are amortized over the life of the lease and tested for impairment in the same manner as long-lived assets used in operations as described in more detail below.
As noted above during fiscal 2022 and fiscal 2021, the Company has engaged in discussions with landlords in an effort to achieve appropriate rent relief and other lease concessions and, in some cases, to terminate existing leases in an effort to lessen the impact of reduced revenue resulting from temporary store closures and lower traffic as a result of the COVID-19 pandemic. Consistent with updated guidance from the FASB in April 2020, the Company has elected to treat any such agreed-upon payment deferrals related to the COVID-19 pandemic as if there were no modifications to the lease contract and has accrued such amounts within the current portion of
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operating lease liabilities in the Company’s consolidated balance sheet. The Company has elected to treat other rent concessions which result in reduced lease payments as variable lease payments if the concessions that are provided are for a period of generally less than 12 months. For any rent concessions which reduce the lease payments for a period of generally more than 12 months or change the payment terms from minimum rental amounts to amounts based on a percentage of sales volume for the remainder of the lease term, the Company has elected to treat such changes as lease modifications under the current lease guidance.
Net Gains on Lease Modifications
During fiscal 2022 and 2021, the Company recorded net gains on lease modifications of approximately $0.3 million and $2.8 million, respectively related primarily to the early termination of certain lease agreements. There were no net gains on lease modifications during fiscal 2020.
Long-Lived Assets
Long-lived assets, such as property and equipment and purchased intangibles subject to amortization,operating lease ROU assets, are reviewed for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The majority of the Company’s long-lived assets relate to its retail operations which consist primarily of regular retail and flagship locations. The Company considers each individual regular retail location as an asset group for impairment testing, which is the lowest level at which individual cash flows can be identified. The asset group includes leasehold improvements, furniture, fixtures and equipment, computer hardware and software, operating lease ROU assets including lease acquisition costs, and certain long-term security deposits, and excludes operating lease acquisition costs.liabilities. The Company reviews regular retail locations in penetrated markets for impairment risk once the locations have been opened for at least one year in their current condition, or sooner as changes in circumstances require. The Company believes that waiting at least one year allows a location to reach a maturity level where a more comprehensive analysis of financial performance can be performed. The Company evaluates impairment risk for regular retail locations in new markets, where the Company is in the early stages of establishing its presence, once brand awareness has been established. The Company also evaluates impairment risk for retail locations that are expected to be closed in the foreseeable future. The Company has flagship locations which are used as a regional marketing tool to build brand awareness and promote the Company’s current product. ImpairmentProvided the flagship locations continue to meet appropriate criteria, impairment for these locations is tested at a reporting unit level similar to goodwill (see below) since they do not have separately identifiable cash flows.
An asset is considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment of the asset’s ability to continue to generate earnings from operations and positive cash flow in future periods or if significant changes in the Company’s strategic business objectives and utilization of the assets occurred. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows adjusted for lease payments, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value. The Company uses estimates of market participant rents to calculate fair value which is determined based onof ROU assets and discounted future cash flows.flows of the asset group to quantify fair value for other long-lived assets. These nonrecurring fair value measurements are considered Level 3 inputs as defined in Note 21. The impairment loss calculations require management to apply judgment in estimating market participant rents, future cash flows, among other things, and the discount rates that reflect the risk inherent in future cash flows. Future expected cash flows for assets in regular retail locations are based on management’s estimates of future cash flows, which include sales and gross margin growth rate assumptions, over the remaining lease period or expected life, if shorter. For expected location closures, the Company will evaluate whether it is necessary to shorten the useful life for any of the assets within the respective asset group. The Company will use this revised useful life when estimating the asset group’s future cash flows. The Company considers historical trends, expected future business trends and other factors when estimating the future cash flow for each regular retail location. The Company also considers factors such as: the local environment for each regular retail location, including mall traffic and competition; the Company’s ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll and, in some cases, renegotiate lease costs. As discussed further above, the COVID-19 pandemic has materially impacted the Company’s financial results during fiscal
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2021 and could continue to impact the Company’s operations in ways the Company is not able to predict today due to the evolving situation. The estimated cash flows used for this nonrecurringCompany has made reasonable assumptions and judgments to determine the fair value measurement are considered a Level 3 inputof the assets tested based on the facts and circumstances that were available as defined in Note 20.of the reporting date. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the Company’s results of operations.
See Note 5 for further details on asset impairment charges.charges related to property and equipment. See Note 9 for further details on asset impairment charges related to ROU assets.
Goodwill
Goodwill is tested annually for impairment or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level which may be either an operating segment or one level below an operating segment if discrete financial information is available. Two or more reporting units within an operating segment may be aggregated for impairment testing if they have similar economic characteristics. The Company has identified its Americas Retail segment, its Americas Wholesale segment and its European wholesale and European retail components of its Europe segment and its China retail component of its Asia segment as reporting units for goodwill impairment testing. In accordance with authoritative guidance, the Company may first assess qualitative factors relevant in determining whether it is more likely than not that the fair valuevalues of its reporting units are less than their carrying amounts. Based on this analysis, the Company may determine whether it is necessary to perform a quantitative impairment test. If it is more likely than not that the fair value of a reporting unit is less than
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its carrying amount, the amount of any impairment loss to be recognized for that reporting unit is determined using two steps. First, the Company determines the fair value of the reporting unit using a discounted cash flow analysis, which requires unobservable inputs (Level 3) within the fair value hierarchy as defined in Note 20.21. These inputs include selection of an appropriate discount rate and the amount and timing of expected future cash flows. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess ofbased on the carrying amount of thedifference between a reporting unit’s goodwill and other intangibles over the implied fair value. The implied fair value is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with authoritative guidance.and its carrying value.
See Note 6 for further details on goodwill impairment charges.
Other Assets
Other assets mainly relate to the Company’s investments in insurance policies held in rabbi trusts to fund expected obligations arising under its non-qualified supplemental executive retirement and deferred compensation plans. Refer to Notes 1213 and 1516 for further information regarding these investments.
In addition, other assets also relate to long-term security key money and other deposits to secure prime retail store locations and receivables related to refundable value-added tax payments mainly from European taxing authorities.
During fiscal 2017, the Company sold its minority interest equity holding in a privately-held boutique apparel company for net proceeds of approximately $34.8 million, which resulted in a gain of approximately $22.3 million which was recorded in other income.
Defined Benefit Plans
In accordance with authoritative guidance for defined benefit pension and other postretirement plans, an asset for a plan’s overfundedover funded status or a liability for a plan’s underfunded status is recognized in the consolidated balance sheets; plan assets and obligations that determine the plan’s funded status are measured as of the end of the Company’s fiscal year; and changes in the funded status of defined benefit postretirement plans are recognized in the year in which they occur. Such changes are reported in other comprehensive income (loss) as a separate component of stockholders’ equity.
The Company’s pension obligations and related costs are calculated using actuarial concepts, within the authoritative guidance framework, and are considered Level 3 inputs as defined in Note 20.21. The Company uses the corridor approach to amortize unrecognized actuarial gains or losses over the average remaining service life of active participants. The life expectancy, estimated retirement age, discount rate, estimated future compensation and expected return on plan assets are important elements of expense and/or liability measurement. These critical assumptions are evaluated annually which enables expected future payments for benefits to be stated at present value on the measurement date. If actual results are not consistent with actuarial assumptions, the amounts recognized for the defined benefit plans could change significantly.
Deferred Rent and Lease Incentives
When a lease includes lease incentives (such as a rent holiday) or requires fixed escalations of the minimum lease payments or advances, rental expense is recognized on a straight-line basis over the term of the lease. The difference between the average rental amount charged to expense and the lease payments or advances under the lease is included either in deferred rent and lease incentives or other assets in the accompanying consolidated balance sheets depending on whether the difference is in a liability or asset position at the end of the period. For construction allowances, the Company records a deferred lease credit on the consolidated balance sheets and amortizes the deferred lease credit as a reduction of rent expense in the consolidated statements of income (loss) over the term of the leases.
Net Gains (Losses) on Lease Terminations
During fiscal 2018, the Company recorded net losses on lease terminations related primarily to the modification of certain lease agreements held with a common landlord in North America. In connection with this modification, the Company made up-front payments of approximately $22 million, of which $12 million was recognized as net losses on lease terminations and $10 million was recorded as advance rent payments. During fiscal 2018, the Company
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also recorded net gains on lease terminations of approximately $1 million related primarily to the early termination of certain lease agreements in Europe.
During fiscal 2017 and fiscal 2016, the Company recorded net gains on lease terminations of $0.7 million and $2.3 million, respectively, related primarily to the early termination of certain lease agreements in Europe.
Litigation Reserves
Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. As additional information becomes available, the Company assesses the potential liability related to new claims and existing claims and revises estimates as appropriate. As new claims arise or existing claims evolve, such revisions in estimates of the potential liability could materially impact the results of operations and financial position.
In April 2019, the Company issued $300 million principal amount of 2.00% convertible senior notes due 2024 (the “Notes”) in a private offering. Certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The liability component was recorded at fair value, which was derived from a valuation technique used to calculate the fair value of a similar liability without an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Notes and the fair value of the liability component of the Notes.
In accounting for the debt issuance costs related to the issuance of the Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component were recorded as a contra-liability and are presented net against the convertible senior notes balance on the Company’s consolidated balance sheets. These costs are amortized to interest expense using the effective interest method over the term of the Notes.
Sale of Australian Stores
During fiscal 2020, the Company entered into a definitive agreement to sell its Australian retail locations to the Company’s wholesale distributor in the region for approximately AUD$7.1 million (US$4.9 million), subject to certain adjustments, and recognized a loss on the sale of approximately AUD$1.2 million (US$0.8 million). During fiscal 2021, the Company recorded an adjustment of AUD$0.7 million (US$0.5 million) to reduce the purchase price. As per the terms of the agreement, the wholesale distributor entered into a promissory note with the Company to make periodic payments on the sale through August 2021. The Company included AUD$4.5 million (US$3.4 million) in accounts receivable, net and other assets in its consolidated balance sheet as of January 30, 2021 and collected the remaining payments as of January 29, 2022.
(2) New Accounting Guidance
Changes inRecently Adopted Accounting PoliciesGuidance
Simplified Accounting for Income Taxes
In July 2015,December 2019, the Financial Accounting Standards Board (“FASB”)FASB issued authoritative guidance simplifying the accounting for income taxes by eliminating certain exceptions to simplifygeneral principles related to intra-period income tax allocations, ownership changes in foreign investments and calculating income taxes in an interim period when year-to-date losses exceed total anticipated losses. The guidance also simplifies the subsequent measurementaccounting for income taxes related to franchise taxes partially based on income, the step up in the income tax basis of inventories by replacinggoodwill, allocation of current and deferred income tax expense for certain legal entities and enacted changes in income tax laws or rates during interim periods, among other improvements. This guidance was adopted during the lowersecond quarter of cost or market test with a lower of cost or net realizable value test. The Company adopted this guidance effective January 29, 2017fiscal 2021 on a prospective basis. The adoption of this guidancebasis and did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In March 2016, the FASB issued authoritative guidance to simplify the accounting for certain aspects of share-based compensation. This guidance addresses the accounting for income tax effects at award settlement, the use of an expected forfeiture rate to estimate award cancellations prior to the vesting date and the presentation of excess tax benefits and shares surrendered for tax withholdings on the statement of cash flows. The Company adopted this guidance effective January 29, 2017. This guidance requires all income tax effects of awards (resulting from an increase or decrease in the fair value of an award from grant date to the vesting date) to be recognized in the income statement when the awards vest or are settled. This is a change from previous guidance that required such activity to be recorded in paid-in capital within stockholders’ equity. The Company adopted this provision prospectively and accordingly recorded tax shortfalls of approximately $1.3 million in its consolidated statement of income (loss) during fiscal 2018. This resulted in a negative impact on net loss attributable to Guess?, Inc. of approximately $1.3 million, or an unfavorable $0.02 per share impact during fiscal 2018. Under this guidance, excess tax benefits are also excluded from the assumed proceeds available to repurchase shares in the computation of diluted earnings (loss) per share. This was adopted prospectively and did not have an impact on the Company’s diluted loss per share for fiscal 2018. This guidance also eliminates the requirement to estimate forfeitures, but rather provides for an election that would allow entities to account for forfeitures as they occur. The Company adopted this election beginning in the first quarter of fiscal 2018 using the modified retrospective method and recorded a cumulative adjustment to reduce retained earnings by approximately $0.3 million. This guidance also changes the presentation of excess tax benefits from a financing activity to an operating activity in the statement of cash flows. This presentation was adopted on a retrospective basis and, as a result, net cash used in operating activities improved by $0.3 million and $0.2 million with a corresponding offset to net cash used in financing activities during fiscal 2017 and fiscal 2016, respectively.
In August 2016, the FASB issued authoritative guidance related to the classification of certain cash receipts and cash payments in the statement of cash flows. The Company adopted this guidance effective January 29, 2017 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements or related disclosures.F-21
In October 2016, the FASB issued authoritative guidance that requires an entity to include indirect interests held through related parties that are under common control on a proportionate basis when evaluating if a reporting entity is the primary beneficiary of a variable interest entity. The Company adopted this guidance effective January 29, 2017. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements or related disclosures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In November 2016, the FASB issued authoritative guidance related to the presentation of restricted cash in the statement of cash flows. This guidance requires that the statement of cash flows reconcile the change during the period in total cash, cash equivalents and restricted cash. The Company’s restricted cash is generally held as collateral for certain transactions. The Company adopted this guidance effective January 29, 2017 on a retrospective basis. As a result, the Company updated its consolidated statements of cash flows for fiscal 2018, fiscal 2017 and fiscal 2016 to include restricted cash with cash and cash equivalents when reconciling the beginning and end of period balances and to eliminate changes in restricted cash that have historically been included within operating and investing activities.
In January 2017, the FASB issued authoritative guidance which clarifies the definition of a business to assist entities when evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The Company early adopted this guidance effective January 29, 2017 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In February 2018, the FASB issued authoritative guidance to address certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the 2017 Tax Cuts and Jobs Act (the “Tax Reform”) enacted in December 2017. This guidance provides the Company with an option to reclassify stranded tax effected within accumulated other comprehensive income (loss) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate due to the Tax Reform is recorded. The Company early adopted this guidance during the fourth quarter of fiscal 2018 and recorded a cumulative adjustment to increase retained earnings by approximately $1.2 million.
Recently Issued Accounting Guidance
Reference Rate Reform
In May 2014,March 2020, the FASB issued a comprehensiveguidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. This guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to certain criteria, referencing LIBOR or another reference rate expected to be discontinued. In January 2021, the FASB issued subsequent amendments to further clarify the scope of optional expedients and exceptions to derivatives affected by the transition. The new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standardguidance is intended to clarifyhelp stakeholders during the principles of recognizing revenue and create common revenue recognition guidance between GAAP and International Financial Reporting Standards. The standard also requires expanded disclosures surrounding revenue recognition. During fiscal 2017, the FASB issued additional clarification guidance on the new revenue recognition standard which also included certain scope improvements and practical expedients. The standard (including clarification guidance issued) is effective for fiscal periods beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and allows for either full retrospective or modified retrospective adoption, with early adoption permitted. global market-wide reference rate transition period.
The Company has adoptedidentified and will modify, if necessary, its loans and other financial instruments with attributes directly or indirectly influenced by LIBOR. The Company determined, of its current LIBOR references as outlined in Note 8 Borrowings and Finance Lease Obligations, Note 21, Fair Value Measurements, and Note 22, Derivative Financial Instruments, only the obligations under Mortgage Debt, Credit Facilities, and Interest Rate Swap Agreements are impacted by this guidance using the modified retrospective method beginning in the first quarter of fiscal 2019.guidance. The Company’s assessment efforts have included reviewing current revenue processes, arrangements and accounting policies to identify potential differences that could arise from the application of this standard on its consolidated financial statements and related disclosures. While the Company does not expect the adoption of this standardguidance to have a material impact on its consolidated financial statements,position, results of operations or cash flows.
Convertible Instruments and Contracts in an Entity’s Own Equity
In August 2020, the FASB issued authoritative guidance to simplify the accounting for convertible instruments and contracts in an entity’s own equity and the diluted earnings per share computations for these instruments. This guidance removes major separation models required under current guidance enabling more convertible debt instruments to be reported as a single liability instrument with no separate accounting for embedded conversion features. This guidance also removes certain settlement conditions required for equity contracts to qualify for the derivative scope exception. In addition, this guidance requires the “if-converted” method be applied for all convertible instruments (the treasury stock method is no longer available) and removes the ability to rebut the presumption of share settlement for contracts that may be settled in cash or stock.
This guidance is effective for fiscal years beginning after December 31, 2021, which is the Company’s first quarter of fiscal 2023, on either a full or modified retrospective basis. The Company will adopt this guidance on January 30, 2022, using the modified retrospective transition method which allows for a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and does not require retrospective adjustments to prior periods. Using this transition method, the cumulative effect of the accounting change is expected to increase the carrying amount of the Notes by approximately $27.5 million, reduce deferred income tax liabilities by approximately $6.2 million, reduce additional paid-in capital by $43.1 million and increase retained earnings by approximately $21.8 million.
Due to the adoption, the Company expects there to be differences related primarily to the classification and timing of when revenue and certain expenses are recognized from its licensing business. These differences relate primarily to changes in the presentation of advertising contributions received from the Company’s licensees and related advertising expenditures incurred by the Company. The Company currently records advertising contributions received from its licensees and the related advertising expenditures incurred by the Company on a net basis in its consolidated balance sheet. To the extent that the advertising contributions exceed the Company’s advertising expenditures for its licensees, the excess contribution is treated as a deferred liability and is included in accrued expenses in the Company’s consolidated balance sheet. Under the new standard, advertising contributions and related advertising expendituresnon-cash interest expense related to the Company’s licensing businessNotes for fiscal 2023 will be recorded on a gross basis which willlower by approximately $11.1 million. In addition, the Company expects an increase net revenue as well as SG&A expenses. The Company also expects revenue related to its e-commerce operationsof approximately 11.6 million shares to be recognized when merchandise is transferred to aincluded in its diluted weighted-average shares of common carrier rather than upon receipt by the customer, as well as adjustments to the accountingstock outstanding for the Company’s loyalty programs due to a slight change inpurposes of calculating diluted earnings per share.
All estimates are based on the valuationbalance of the amountNotes outstanding as of January 29, 2022.
Modifications or Exchanges of Freestanding Equity-Classified Written Call Options
In May 2021, the FASB issued authoritative guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that is deferred related to points earned. Additionally, allowancesremains classified in equity after modification or exchange of the original instrument for wholesale sales returns and wholesale markdowns will be presenteda new instrument. An issuer should measure the effect of a modification or exchange as accrued expenses rather than as reductions to accounts receivablethe difference between the fair value of the modified or exchanged warrant and the estimated costfair value of inventory associated withthat warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the allowancecorresponding accounting treatment for sales returns will be presented within other current assets in the Company’s consolidated balance sheet.
each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification).
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 2016, the FASB issued authoritative guidance which requires equity investments not accounted for under the equity method of accounting or consolidation accounting to be measured at fair value, with subsequent changes in fair value recognized in net income. In February 2018, the FASB issued additional clarification guidance which made targeted improvements to address certain aspects of recognition, measurement, presentation and disclosure requirements for financial instruments. The originalThis guidance is effective for all entities for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The clarification guidance is effective for fiscal years beginning after December 15, 2017 and2021, including interim periods beginning after June 15, 2015, which will be the Company’s third quarter of fiscal 2019. The clarification guidance may be early adopted, provided that the original guidance issued has been adopted. The adoption ofperiods. An entity should apply this guidance (includingprospectively to modifications or exchanges occurring on or after the clarification guidance) is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures unless the Company acquires new equity investments.
In February 2016, the FASB issued a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize assets and liabilities related to long-term leases that were classified as operating leases under previous guidance in its balance sheet. An asset would be recognized related to the right to use the underlying asset and a liability would be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases. The standard is effective for fiscal periods beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020, and requires modified retrospective adoption, with early adoption permitted. The Company expects that this adoption will result in material increases in assets and liabilities in its consolidated balance sheet as well as enhanced disclosures. The Company is in the process of implementing controls and system changes to enable the preparation of the required financial information for this standard.
In June 2016, the FASB issued authoritative guidance related to the measurement of credit losses on financial instruments. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021. Early adoption is permitted for fiscal periods beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued authoritative guidance which amends the accounting for income taxes on intra-entity transfers of assets other than inventory. This guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The income tax consequences on intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is permitted at the beginning of a fiscal year.date. The adoption of this guidance is not expected to have a materialany impact on the Company’s consolidated financial statementsstatement presentation or related disclosures.
Government Assistance
In January 2017,November 2021, the FASB issued authoritative guidance to simplifyincrease the testing for goodwill impairment by removing step two from the goodwill testing. Under current guidance, if the fair valuetransparency of a reporting unit is lower than its carrying amount (step one), an entity would calculate an impairment charge by comparing the implied fair value of goodwill with its carrying amount (step two). The implied fair value of goodwill was calculated by deducting the fair value of the assets and liabilities of the respective reporting unit from the reporting unit’s fair value as determined under step one. This guidance instead provides that an impairment charge should be recognized based on the difference between a reporting unit’s fair value and its carrying value. This guidance also does not require a qualitative test to be performed on reporting units with zero or negative carrying amounts. However, entities need to disclose any reporting units with zero or negative carrying amounts that have goodwill and the amount of goodwill allocated to each.government assistance. This guidance is effective for fiscal yearsfinancial statements issued for annual periods beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.permitted. The Company is currently evaluating this guidance and does not expect the adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March 2017, the FASB issued authoritative guidance related to the presentation of net periodic pension cost in the income statement. This guidance requires that the service cost component of net periodic pension cost is presented in the same line as other compensation costs arising from services rendered by the employees during the period. The other non-service components of net periodic pension cost are required to be presented in the income statement separately from the service cost component and outside of earnings from operations. This guidance also allows for the service cost component to be eligible for capitalization when applicable. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and requires retrospective adoption for the presentation of the service cost component and other non-service components of net periodic pension cost in the income statement and prospective adoption for capitalization of the service cost component. Other than the change in presentation of other non-service components of net periodic pension cost within the Company’s consolidated statements of income, the adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements and related disclosures.
In May 2017, the FASB issued authoritative guidance that provides clarification on accounting for modifications in share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, with early adoption permitted. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements or related disclosures unless there are modifications to the Company’s share-based payment awards.
In August 2017, the FASB issued authoritative guidance to better align the results of hedge accounting with an entity’s risk management activities. This guidance updates the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. This guidance is effective for fiscal years beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with early adoption permitted. The updated presentation and disclosure guidance is required only on a prospective basis. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures. statements.
(3) Accounts Receivable
Accounts receivable is summarized as follows (in thousands):
| | | Feb 3, 2018 | | Jan 28, 2017 | | Jan 29, 2022 | | Jan 30, 2021 |
Trade | $ | 290,478 |
| | $ | 234,690 |
| Trade | $ | 299,160 | | | $ | 288,782 | |
Royalty | 5,504 |
| | 19,881 |
| Royalty | 33,790 | | | 20,565 | |
Other | 13,233 |
| | 5,888 |
| Other | 6,945 | | | 19,000 | |
| 309,215 |
| | 260,459 |
| | 339,895 | | | 328,347 | |
| Less allowances | 49,219 |
| | 34,922 |
| Less allowances | 11,039 | | | 14,200 | |
| $ | 259,996 |
| | $ | 225,537 |
| |
| | | | $ | 328,856 | | | $ | 314,147 | |
Accounts receivable consists of trade receivables relating primarily to the Company’s wholesale business in Europe and, to a lesser extent, to its wholesale businesses in Asiathe Americas and the Americas,Asia, royalty receivables relating to its licensing operations, credit card and retail concession receivables related to its retail businesses and certain other receivables. Other receivables generally relate to amounts due to the Company that result from activities that are not related to the direct sale of the Company’s products or collection of royalties. The accounts receivable allowance includes allowances for doubtful accounts, wholesale sales returns and wholesale markdowns. Retail sales returns allowances are included in accrued expenses.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Inventories
Inventories consist of the following (in thousands):
| | | | | | | | | | | |
| Jan 29, 2022 | | Jan 30, 2021 |
Raw materials | $ | 1,228 | | | $ | 53 | |
Work in progress | 3 | | | 43 | |
Finished goods | 461,064 | | | 389,048 | |
| $ | 462,295 | | | $ | 389,144 | |
|
| | | | | | | |
| Feb 3, 2018 | | Jan 28, 2017 |
Raw materials | $ | 604 |
| | $ | 799 |
|
Work in progress | 16 |
| | 78 |
|
Finished goods | 427,684 |
| | 366,504 |
|
| $ | 428,304 |
| | $ | 367,381 |
|
The above balances include an allowance to write down inventories to the lower of cost or net realizable value of $29.9$31.8 million and $19.4$35.5 million as of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, respectively.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) Property and Equipment
Property and equipment is summarized as follows (in thousands):
| | | | | | | | Jan 29, 2022 | | Jan 30, 2021 |
| Feb 3, 2018 | | Jan 28, 2017 | |
Land and land improvements | $ | 2,750 |
| | $ | 2,750 |
| |
Building and building improvements | 51,285 |
| | 47,673 |
| |
Land, buildings and improvements | | Land, buildings and improvements | $ | 51,530 | | | $ | 53,553 | |
Leasehold improvements | 380,234 |
| | 367,294 |
| Leasehold improvements | 354,040 | | | 374,666 | |
Furniture, fixtures and equipment | 389,393 |
| | 353,843 |
| Furniture, fixtures and equipment | 433,158 | | | 426,044 | |
Construction in progress | 16,555 |
| | 13,163 |
| Construction in progress | 18,749 | | | 6,486 | |
Assets under capital leases | 19,560 |
| | — |
| |
Assets under finance leases | | Assets under finance leases | 36,694 | | | 30,663 | |
| 859,777 |
| | 784,723 |
| | 894,171 | | | 891,412 | |
Less accumulated depreciation and amortization | 565,523 |
| | 541,718 |
| Less accumulated depreciation and amortization | 665,406 | | | 675,216 | |
| $ | 294,254 |
| | $ | 243,005 |
| | $ | 228,765 | | | $ | 216,196 | |
During fiscal 2016,2022 and 2021, the Company purchased, for approximately $28.8 million, the facility that houses its U.S. distribution center.
During fiscal 2018, the Company began the relocation of its European distribution center to the Netherlands and entered into a capital lease for equipment used in the new facility. During fiscal 2018, the Company also entered into a capital leasefinance and operating leases related primarily to computer hardware and software. The accumulated depreciation and amortization related to assets under capitalfinance leases was approximately $0.9$14.8 million and $10.1 million as of February 3, 2018January 29, 2022 and January 30, 2021, respectively, and was included in depreciation expense when recognized. See Note 8 for more information regarding the related capitalfinance lease obligations.
Construction in progress represents the costs associated with the construction in progress of leasehold improvements to be used in the Company’s operations, primarily for new and remodeled stores in retail operations.
Impairment
The Company recorded asset impairment charges related to property and equipment of $8.5$2.4 million,, $34.4 $35.0 million and $2.3$7.5 million for in fiscal 2018,2022, fiscal 20172021 and fiscal 2016,2020, respectively. The asset impairment charges related to certain retail locations primarily in North America, Europe and Asia driven by lower revenue and future cash flow projections from the ongoing effects of the COVID-19 pandemic in fiscal 2022 and fiscal 2021. The asset impairment charges for fiscal 2020 related primarily to the impairment of certain retail locations in Asia, Europe and North America resulting from under-performancethe underperformance and expected store closures during each of the respective periods.closures.
Impairments to long-lived assetsproperty and equipment are summarized as follows (in thousands):
|
| | | | | | | |
| Feb 3, 2018 | | Jan 28, 2017 |
Aggregate carrying value of long-lived assets impaired | $ | 8,728 |
| | $ | 36,103 |
|
Less asset impairment charges | 8,479 |
| | 34,385 |
|
Aggregate remaining fair value of long-lived assets impaired | $ | 249 |
| | $ | 1,718 |
|
| | | | | | | | | | | |
| Jan 29, 2022 | | Jan 30, 2021 |
Aggregate carrying value of property and equipment impaired | $ | 24,422 | | | $ | 36,050 | |
Less property and equipment impairment charges | 2,414 | | | 34,996 | |
Aggregate remaining fair value of property and equipment impaired | $ | 22,008 | | | $ | 1,054 | |
| | | |
The Company’s impairment evaluations included testing of 233496 retail locations and 255834 retail locations during fiscal 20182022 and fiscal 2017,2021, respectively, which were deemed to have impairment indicators. The Company concluded
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that 9942 retail locations and 148373 retail locations, respectively, were determined to be impaired, as the carrying amounts of the fixed assets exceeded their estimated fair values (determined based on discounted cash flows) at each of the respective dates. Refer to Note 1 for a description of other assumptions that management considers in estimating the future discounted cash flows. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the Company’s results of operations.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) Goodwill and Intangible Assets
Goodwill activity is summarized by business segment as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Americas Retail | | Americas Wholesale | | Europe | | Asia | | Total |
Goodwill balance at February 1, 2020 | $ | 1,725 | | | $ | 9,965 | | | $ | 23,087 | | | $ | — | | | $ | 34,777 | |
Adjustments: | | | | | | | | | |
| | | | | | | | | |
Translation and other adjustments | 22 | | | 4 | | | 1,933 | | | — | | | 1,959 | |
Goodwill balance at January 30, 2021 | 1,747 | | | 9,969 | | | 25,020 | | | — | | | 36,736 | |
Adjustments: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Translation and other adjustments | — | | | — | | | (1,851) | | | — | | | (1,851) | |
Goodwill balance at January 29, 2022 | $ | 1,747 | | | $ | 9,969 | | | $ | 23,169 | | | $ | — | | | $ | 34,885 | |
|
| | | | | | | | | | | | | | | | | | | |
| Americas Retail | | Americas Wholesale | | Europe | | Asia | | Total |
Goodwill balance at January 30, 2016 | $ | 1,693 |
| | $ | 9,960 |
| | $ | 21,759 |
| | $ | — |
| | $ | 33,412 |
|
Adjustments: | | | | | | | | | |
Acquisition | — |
| | — |
| | — |
| | 933 |
| | 933 |
|
Translation adjustments | 36 |
| | 6 |
| | (287 | ) | | — |
| | (245 | ) |
Goodwill balance at January 28, 2017 | 1,729 |
| | 9,966 |
| | 21,472 |
| | 933 |
| | 34,100 |
|
Adjustments: | | | | | | | | | |
Acquisition | — |
| | — |
| | — |
| | 566 |
| | 566 |
|
Translation adjustments | 36 |
| | 6 |
| | 3,653 |
| | 120 |
| | 3,815 |
|
Goodwill balance at February 3, 2018 | $ | 1,765 |
| | $ | 9,972 |
| | $ | 25,125 |
| | $ | 1,619 |
| | $ | 38,481 |
|
The Company has nohad $1.5 million accumulated impairment related to goodwill.goodwill as of both January 29, 2022 and January 30, 2021.
The COVID-19 pandemic has materially impacted the Company’s financial results during fiscal 2021 as discussed further in Note 1. During fiscal 2022, the Company assessed qualitative factors and determined that it is not more likely than not that the fair values of its reporting units are less than their carrying amounts. Accordingly, the Company did not record any asset impairment charges on its goodwill or flagship assets that continued to meet the appropriate criteria during fiscal 2022. In performing its assessment, the Company believes it made reasonable accounting estimates based on the facts and circumstances that were available as of the testing date in light of the evolving situation resulting from the COVID-19 pandemic. If actual results are not consistent with the assumptions and judgments used, there may be additional exposure to future impairment losses that could be material to the Company’s results of operations.
From time-to-time, the Company may acquire certain retail locations from its wholesale partners which may result in the recognition of goodwill or other intangible assets. During fiscal 2018,
(7) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are summarized as follows (in thousands):
| | | | | | | | | | | |
| Jan 29, 2022 | | Jan 30, 2021 |
Accrued compensation and benefits | $ | 79,212 | | | $ | 65,851 | |
Allowance for sales returns | 38,419 | | | 27,193 | |
Sales and use taxes, property taxes and other indirect taxes | 29,949 | | | 24,953 | |
Allowance for markdowns | 19,014 | | | 16,245 | |
Income taxes | 14,540 | | | 8,218 | |
Deferred royalties and other revenue | 12,852 | | | 10,731 | |
Construction costs | 11,874 | | | 2,586 | |
Professional and legal fees | 10,004 | | | 12,075 | |
Loyalty programs | 5,975 | | | 5,435 | |
Gift cards | 4,437 | | | 4,457 | |
Accrued percentage rent1 | 4,194 | | | 2,177 | |
Accrued interest | 2,679 | | | 2,556 | |
Advertising | 1,812 | | | 1,626 | |
Other | 18,221 | | | 16,499 | |
| $ | 253,182 | | | $ | 200,602 | |
1Accrued percentage rent mainly relates to accruals for lease payments based on a percentage of annual sales volume. Accruals for fixed lease payments are included in the Company recognized goodwill of approximately $0.6 million related to the acquisition of 14 retail locations from three of its Asian wholesale partners. During fiscal 2017, the Company recognized goodwill of approximately $0.9 million related to the acquisition of 12 retail locations from five of its Asian wholesale partners.
Other intangible assets as of February 3, 2018 consisted primarilycurrent portion of lease and license acquisition costs related to European acquisitions. Gross intangible assets were $33.6 million and $29.7 million as of February 3, 2018 and January 28, 2017, respectively. The accumulated amortization of intangible assets with finite useful lives was $27.6 million and $23.2 million forliabilities in the years ended February 3, 2018 and January 28, 2017, respectively. For these assets, amortization expense over the next five years is expected to be approximately $1.2 million in fiscal 2019, $1.0 million in fiscal 2020, $0.9 million in fiscal 2021, $0.8 million in fiscal 2022 and $0.7 million in fiscal 2023.
Company’s consolidated balance sheet.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) Accrued Expenses
Accrued expenses are summarized as follows (in thousands):
|
| | | | | | | |
| Feb 3, 2018 | | Jan 28, 2017 |
Accrued compensation and benefits | $ | 73,815 |
| | $ | 50,954 |
|
Sales and use taxes, property taxes and other indirect taxes | 33,390 |
| | 22,480 |
|
Derivative financial instruments | 16,487 |
| | 1,408 |
|
Professional and legal fees | 14,281 |
| | 7,982 |
|
Store credits, loyalty and gift cards | 9,846 |
| | 9,519 |
|
Advertising | 9,677 |
| | 7,746 |
|
Accrued rent | 8,039 |
| | 6,342 |
|
Deferred royalties and other revenue | 7,273 |
| | 7,891 |
|
Share repurchase | 6,033 |
| | — |
|
Income taxes | 5,186 |
| | 653 |
|
Construction costs | 3,428 |
| | 4,210 |
|
Retail sales returns allowance | 2,917 |
| | 2,723 |
|
Restructuring charges | — |
| | 180 |
|
Other | 10,190 |
| | 13,183 |
|
| $ | 200,562 |
| | $ | 135,271 |
|
(8) Borrowings and CapitalFinance Lease Obligations
Borrowings and capitalfinance lease obligations are summarized as follows (in thousands):
| | | | | | | | | | | |
| Jan 29, 2022 | | Jan 30, 2021 |
Term loans | $ | 48,253 | | | $ | 56,765 | |
Finance lease obligations | 22,943 | | | 22,063 | |
Mortgage debt | 17,860 | | | 18,507 | |
Borrowings under credit facilities | 12,201 | | | 7,332 | |
Other | 3,092 | | | 2,597 | |
| 104,349 | | | 107,264 | |
Less current installments | 43,379 | | | 38,710 | |
Long-term debt and finance lease obligations | $ | 60,970 | | | $ | 68,554 | |
|
| | | | | | | |
| Feb 3, 2018 | | Jan 28, 2017 |
Mortgage debt, maturing monthly through January 2026 | $ | 20,323 |
| | $ | 20,889 |
|
Capital lease obligations | 18,589 |
| | — |
|
Other | 3,129 |
| | 3,159 |
|
| 42,041 |
| | 24,048 |
|
Less current installments | 2,845 |
| | 566 |
|
Long-term debt and capital lease obligations | $ | 39,196 |
| | $ | 23,482 |
|
Term LoansAs a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, in addition to drawing down on certain of the credit facilities as noted below, the Company entered into term loans with certain banks primarily in Europe during the fiscal year ended January 30, 2021. These loans are primarily unsecured, have remaining terms ranging from one-to-four years and provide annual interest rates ranging between 1.3% to 2.2%. As of January 29, 2022 and January 30, 2021, the Company had outstanding borrowings of $48.3 million and $56.8 million under these borrowing arrangements, respectively.
Finance Lease Obligations
During fiscal 2018, the Company began the relocation of its European distribution center to the Netherlands. The finance lease primarily provides for monthly minimum lease payments through May 2027 with an effective interest rate of approximately 6%. The Company has also entered into finance leases for equipment used in its European distribution centers. As of January 29, 2022 and January 30, 2021, the finance lease obligation was $19.6 million and $18.4 million, respectively.
The Company also has smaller finance leases related primarily to computer hardware and software. As of January 29, 2022 and January 30, 2021, these finance obligations totaled $3.4 million and $3.7 million, respectively.
Mortgage Debt
On February 16, 2016, the Company entered into a ten-yearten-year $21.5 million real estate secured loan (the “Mortgage Debt”). The Mortgage Debt is secured by the Company’s U.S. distribution center based in Louisville, Kentucky and provides for monthly principal and interest payments based on a 25-year amortization schedule, with the remaining principal balance and any accrued and unpaid interest due at maturity. Outstanding principal balances under the Mortgage Debt bear interest at the one-month LIBOR rate plus 1.5%. As of February 3, 2018,January 29, 2022, outstanding borrowings under the Mortgage Debt, net of debt issuance costs, were $17.9 million. At January 30, 2021, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $20.3$18.5 million. At January 28, 2017, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $20.9 million.
The Mortgage Debt requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if consolidated cash, cash equivalents, and short term investment balances and availability under borrowing arrangements fall below certain levels. In addition, the Mortgage Debt contains customary covenants, including covenants that limit or restrict the Company’s ability to incur liens on the mortgaged property and enter into certain contractual obligations. Upon the occurrence of an event of default under the Mortgage Debt, the lender may terminate the Mortgage Debt and declare all amounts outstanding to be immediately due and payable. The Mortgage Debt specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On February 16, 2016, the Company also entered into a separate interest rate swap agreement, designated as a cash flow hedge, that resulted in a swap fixed rate of approximately 3.06%. This interest rate swap agreement matures
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in January 2026 and converts the nature of the Mortgage Debt from LIBOR floating-rate debt to fixed-rate debt. The fair value of the interest rate swap assetliability was approximately $1.5$0.1 million and $0.9$1.0 million as of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, respectively.
Capital Lease ObligationsCredit Facilities
During fiscal 2018, the Company began the relocation of its European distribution center to the Netherlands. As a result,2021, the Company entered into a capital leasean amendment of $17.0 million for equipment used in the new facility. The capital lease primarily provides for monthly minimum lease payments through May 2027 with an effective interest rate of approximately 6%. As of February 3, 2018, the capital lease obligation was $17.3 million.
During fiscal 2018, the Company also entered into a capital lease for $1.5 million related primarily to computer hardware and software. As of February 3, 2018, this capital lease obligation was $1.3 million.
The Company previously leased a building in Florence, Italy under a capital lease which provided for minimum lease payments through May 1, 2016. Upon termination of the capital lease, the title of the building was transferred to the Company. The Company had a separate interest rate swap agreement designated as a non-hedging instrument that converted the nature of the capital lease obligation from Euribor floating-rate debt to fixed-rate debt and resulted in a swap fixed rate of 3.55%. This interest rate swap agreement matured on February 1, 2016.
Credit Facilities
On June 23, 2015, the Company entered into a five-yearits senior secured asset-based revolving credit facility with Bank of America, N.A. and the other lenders party thereto (the(as amended, the “Credit Facility”). The Credit Facility provides for a borrowing capacity in an amount up to $150$120 million, including a Canadian sub-facility up to $50$20 million, subject to a borrowing base. Based on applicable accounts receivable and inventory eligible cash balances and relevant covenant restrictions as of February 3, 2018,January 29, 2022, the Company could have borrowed up to $87$110 million under the Credit Facility. The Credit Facility has an option to expand the borrowing capacity by up to $150$180 million subject to certain terms and conditions, including the willingness of existing or new lenders to assume such increased amount. The Credit Facility is available for direct borrowings and the issuance of letters of credit, subject to certain letters of credit sublimits, and may be used for working capital and other general corporate purposes.
All obligations under the Credit Facility are unconditionally guaranteed by the Company and the Company’s existing and future domestic and Canadian subsidiaries, subject to certain exceptions, and are secured by a first priority lien on substantially all of the assets of the Company and such domestic and Canadian subsidiaries, as applicable.
Direct borrowings under the Credit Facility made by the Company and its domestic subsidiaries shall bear interest at the U.S. base rate plus an applicable margin (varying from 0.25%0.75% to 0.75%1.25%) or at LIBOR plus an applicable margin (varying from 1.25%1.75% to 1.75%2.25%), provided that LIBOR may not be less than 1.0%. The U.S. base rate is based on the greater of (i) the U.S. prime rate, (ii) the federal funds rate, plus 0.5%, and (iii) LIBOR for a 30 day30-day interest period, plus 1.0%. Direct borrowings under the Credit Facility made by the Company’s Canadian subsidiaries shall bear interest at the Canadian prime rate plus an applicable margin (varying from 0.25%0.75% to 0.75%1.25%) or at the Canadian BA rate plus an applicable margin (varying from 1.25%1.75% to 1.75%2.25%), provided that the Canadian BA rate may not be less than 1.0%. The Canadian prime rate is based on the greater of (i) the Canadian prime rate (ii) the Bank of Canada overnight rate, plus 0.5%, and (iii)(ii) the Canadian BA rate for a one monthone-month interest period, plus 1.0%., provided that the Canadian prime rate may not be less than zero. The applicable margins are calculated quarterly and vary based on the average daily availability of the aggregate borrowing base. The Company is also obligated to pay certain commitment, letter of credit and other fees customary for a credit facility of this size and type. AsAs of February 3, 2018,January 29, 2022 and January 30, 2021, the Company had $1.0$10.1 million and $2.1 million in outstanding standby letters of credit, norespectively, 0 outstanding documentary letters of credit and no outstanding borrowings under the Credit Facility.
The Credit Facility requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if a default or an event of default occurs under the Credit Facility or generally if borrowings exceed 80% of the borrowing base. In addition, the Credit Facility contains customary covenants, including covenants that limit or restrict the Company and certain of its subsidiaries’ ability to: incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. Upon the occurrence of an event of default under the Credit Facility, the lenders may cease making loans, terminate the Credit Facility and declare all amounts outstanding to be immediately due and
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
payable. The Credit Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults, and material judgment defaults. The Credit Facility allows for both secured and unsecured borrowings outside of the Credit Facility up to specified amounts.
The Company, through its European subsidiaries, maintains short-term uncommittedcommitted borrowing agreements, primarily for working capital purposes, with various banks in Europe. The majoritySome of the borrowings under these agreements are secured by specific accounts receivable balances. Based on the applicable accounts receivable balances as of February 3, 2018, the Company could have borrowed up to $87.5 million under these agreements.include certain equity-based financial covenants. As of February 3, 2018,January 29, 2022 and January 30, 2021, the Company had no outstanding borrowings, orno outstanding documentary letters of credit, and $126.9 million and $148.4 million available for
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
future borrowings under these agreements.agreements, respectively. The agreements are denominated primarily in euros and provide for annual interest rates ranging from 0.5%0.9% to 4.6%1.1%.
The maturities of anyCompany, through its China subsidiary, maintains a short-term uncommitted bank borrowing agreement that provides for a borrowing capacity up to $30 million, primarily for working capital purposes. The Company had $12.2 million and $7.3 million in outstanding borrowings under these arrangements are generally linked to the credit termsthis agreement as of the underlying accounts receivableJanuary 29, 2022 and January 30, 2021, respectively.
The Company, through its Japan subsidiary, maintains a short-term uncommitted bank borrowing agreement that secure the borrowings. With the exception of one facilityprovides for a borrowing capacity up to $43.6$4.3 million, that has a minimum net equity requirement, there areprimarily for working capital purposes. The Company had no other financial ratio covenants.outstanding borrowings under this agreement as of January 29, 2022 and January 30, 2021.
Other
From time-to-time, the Company will obtain other financing in foreign countries for working capital to finance its local operations.
Maturities of the Company’s debt and capitalfinance lease obligations as of February 3, 2018January 29, 2022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Debt | | Finance Lease | | Total |
Fiscal 2023 | $ | 37,573 | | | $ | 5,806 | | | $ | 43,379 | |
Fiscal 2024 | 14,861 | | | 6,028 | | | 20,889 | |
Fiscal 2025 | 10,463 | | | 4,222 | | | 14,685 | |
Fiscal 2026 | 3,397 | | | 3,373 | | | 6,770 | |
Fiscal 2027 | 15,156 | | | 1,803 | | | 16,959 | |
Thereafter | — | | | 1,711 | | | 1,711 | |
Total principal payments | 81,450 | | | 22,943 | | | 104,393 | |
Less unamortized debt issuance costs | 44 | | | — | | | 44 | |
Total debt and finance lease obligations | $ | 81,406 | | | $ | 22,943 | | | $ | 104,349 | |
(9) Lease Accounting
The Company primarily leases its showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under operating lease agreements expiring on various dates through January 2039. The Company also leases some of its equipment as well as computer hardware and software under operating and finance lease agreements expiring on various dates through May 2027.
The Company’s lease agreements primarily provide for lease payments based on a minimum annual rental amount, a percentage of annual sales volume, periodic adjustments related to inflation or a combination of such lease payments. Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from 3% to 28%, when specific sales volumes are exceeded. The Company’s retail concession leases also provide for rents primarily based upon a percentage of annual sales volume which average approximately 32% of annual sales volume. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
In addition to the amounts as disclosed below, the Company has estimated additional operating lease commitments of approximately $30.7 million for leases where the Company has not yet taken possession of the underlying asset as of January 29, 2022. As such, the related operating lease ROU assets and operating lease liabilities have not been recognized in the Company’s consolidated balance sheet as of January 29, 2022.
|
| | | | | | | | | | | |
| Debt | | Capital Lease | | Total |
Fiscal 2019 | $ | 1,361 |
| | $ | 1,594 |
| | $ | 2,955 |
|
Fiscal 2020 | 1,893 |
| | 1,767 |
| | 3,660 |
|
Fiscal 2021 | 1,725 |
| | 1,923 |
| | 3,648 |
|
Fiscal 2022 | 659 |
| | 1,944 |
| | 2,603 |
|
Fiscal 2023 | 682 |
| | 1,895 |
| | 2,577 |
|
Thereafter | 17,221 |
| | 9,466 |
| | 26,687 |
|
Total principal payments | 23,541 |
| | 18,589 |
| | 42,130 |
|
Less unamortized debt issuance costs | 89 |
| | — |
| | 89 |
|
Total debt and capital lease obligations | $ | 23,452 |
| | $ | 18,589 |
| | $ | 42,041 |
|
F-28
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of leases are as follows (in thousands):
(9) Restructuring Charges | | | | | | | | | | | | | | | | |
| Jan 29, 2022 | | Jan 30, 2021 | | | |
Assets | | | | Balance Sheet Location | | |
Operating | $ | 685,799 | | | $ | 764,804 | | Operating right-of-use assets | | |
Finance | 21,898 | | | 20,595 | | Property and equipment, net | | |
Total lease assets | $ | 707,697 | | | $ | 785,399 | | | | |
| | | | | | |
Liabilities | | | | Balance Sheet Location | | |
Current: | | | | | | |
Operating | $ | 195,516 | | | $ | 222,800 | | Current portion of operating lease liabilities | | |
Finance | 5,806 | | | 4,698 | | Current portion of borrowings and finance lease obligations | | |
Noncurrent: | | | | | | |
Operating | 582,757 | | | 662,657 | | Long-term operating lease liabilities | | |
Finance | 17,137 | | | 17,365 | | Long-term debt and finance lease obligations | | |
Total lease liabilities | $ | 801,216 | | | $ | 907,520 | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Year Ended Jan 29, 2022 | | Year Ended Jan 30, 2021 | | Year Ended Feb 1, 2020 | |
| | | | | | Income Statement Location |
Operating lease costs | $ | 181,888 | | | $ | 205,065 | | | $ | 244,222 | | Cost of product sales |
Operating lease costs | 25,047 | | | 21,726 | | | 24,565 | | Selling, general and administrative expenses |
Operating lease costs1 | (259) | | | (2,801) | | | — | | Net gains on lease modifications |
Finance lease costs | | | | | | |
Amortization of leased assets2 | 55 | | | 49 | | | 289 | | Cost of product sales |
Amortization of leased assets2 | 5,525 | | | 3,834 | | | 2,234 | | Selling, general and administrative expenses |
Interest on lease liabilities | 1,462 | | | 1,237 | | | 1,035 | | Interest expense |
Variable lease costs3 | 75,339 | | | 52,304 | | | 93,534 | | Cost of product sales |
Variable lease costs3 | 2,175 | | | 1,795 | | | 2,227 | | Selling, general and administrative expenses |
Short-term lease costs | 366 | | | 694 | | | 344 | | Cost of product sales |
Short-term lease costs | 4,856 | | | 5,023 | | | 3,543 | | Selling, general and administrative expenses |
Total lease costs | $ | 296,454 | | | $ | 288,926 | | | $ | 371,993 | | |
1During the first quarteryear ended January 29, 2022 and January 30, 2021, net gains on lease modifications related primarily to the early termination of fiscal 2017, the Company implemented a global cost reduction and restructuring plan to better align its global cost and organizational structure with its current strategic initiatives. This plan included the consolidation and streamlininglease agreements for certain of the Company’s business processes and a reduction in its global workforce and other expenses. These actions resulted in restructuring charges related primarilyretail locations. Operating lease costs for these retail locations prior to cash-based severance costs of $6.1 million during fiscal 2017. Therethe early termination were no restructuring charges incurred during fiscal 2018. The Company does not expect significant future cash-based severance charges to be incurred under this plan as the actions were completed during fiscal 2017. As of February 3, 2018, there were no amounts included in accrued expensescost of product sales.
2Amortization of leased assets related to these restructuring activities asfinance leases are included in depreciation expense within cost of product sales or selling, general and administrative expenses depending on the nature of the asset in the Company’s consolidated statements of income (loss).
3During the year ended January 29, 2022 and January 30, 2021, variable lease costs included certain rent concessions received by the Company, completed payments forprimarily in Europe, related to the remaining anticipated costs during fiscal 2018. At January 28, 2017, the Company had a balanceCOVID-19 pandemic of approximately $0.2$17.3 million in accrued expenses relatedand $33.1 million, respectively. Refer to these restructuring activities.
The following table summarizes restructuring activities related primarily to severance during fiscal 2017 and fiscal 2018 (in thousands):Note 1 for further information.
|
| | | | |
| | Total |
Balance at January 30, 2016 | | $ | — |
|
Charges to operations | | 6,083 |
|
Cash payments | | (6,003 | ) |
Foreign currency and other adjustments | | 100 |
|
Balance at January 28, 2017 | | $ | 180 |
|
Cash payments | | (124 | ) |
Foreign currency and other adjustments | | (56 | ) |
Balance at February 3, 2018 | | $ | — |
|
F-29During fiscal 2017, the Company also incurred an estimated exit tax charge of approximately $1.9 million related to its reorganization in Europe as a result of the global cost reduction and restructuring plan. The exit tax charge has not been finalized with the local authorities and actual amounts could differ significantly from these estimates as negotiations are completed.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Maturities of the Company’s operating and finance lease liabilities as of January 29, 2022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Leases | | | | | | |
| Non-Related Parties | | Related Parties | | Finance Leases | | Total | | |
Maturity of Lease Liabilities: | | | | | | | | | |
2023 | $ | 210,759 | | | $ | 7,648 | | | $ | 6,872 | | | $ | 225,279 | | | |
2024 | 160,515 | | | 7,875 | | | 6,746 | | | 175,136 | | | |
2025 | 116,997 | | | 7,252 | | | 4,861 | | | 129,110 | | | |
2026 | 86,083 | | | 6,859 | | | 3,983 | | | 96,925 | | | |
2027 | 67,376 | | | 7,560 | | | 2,461 | | | 77,397 | | | |
After 2027 | 148,748 | | | 28,574 | | | 688 | | | 178,010 | | | |
Total lease payments | 790,478 | | | 65,768 | | | 25,611 | | | 881,857 | | | |
Less: Interest | 67,707 | | | 10,266 | | | 2,668 | | | 80,641 | | | |
Present value of lease liabilities | $ | 722,771 | | | $ | 55,502 | | | $ | 22,943 | | | $ | 801,216 | | | |
Other supplemental information is as follows (in thousands):
| | | | | | | | | | | |
| Jan 29, 2022 | | | | | | |
Lease Term and Discount Rate: | | | | | | | |
Weighted-average remaining lease term (years) | | | | | | | |
Operating leases | 6.1 years | | | | | | |
Finance leases | 4.3 years | | | | | | |
Weighted-average discount rate | | | | | | | |
Operating leases | 3.4% | | | | | | |
Finance leases | 5.5% | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended Jan 29, 2022 | | Year Ended Jan 30, 2021 | | Year Ended Feb 1, 2020 | | | | | | |
Supplemental Cash Flow Information: | | | | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | | | | |
Operating cash flows from operating leases | $ | 225,652 | | | $ | 193,776 | | | $ | 250,972 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
New operating ROU assets obtained in exchange for lease liabilities | $ | 156,102 | | | $ | 189,412 | | | $ | 127,232 | | | | | | | |
Impairment of ROU Assets
During fiscal 2022, the Company recorded asset impairment charges of $0.7 million related to ROU assets at certain retail locations primarily in Europe. During fiscal 2021, the Company recorded asset impairment charges of $45.4 million related primarily to ROU assets at certain retail locations in North America and Europe. During fiscal 2020, the Company recorded asset impairment charges of $1.0 million related primarily to ROU assets at certain retail locations in North America. The asset impairment charges were determined based on the excess of the carrying value over the fair value of the ROU assets. The Company uses market participant rents to calculate fair value of ROU assets. Refer to Note 1 for more information on the Company’s impairment testing.
(10) Convertible Senior Notes and Related Transactions
2.00% Convertible Senior Notes due 2024
In April 2019, the Company issued $300 million principal amount of 2.00% convertible senior notes due 2024 in a private offering. In connection with the issuance of the Notes, the Company entered into an indenture (the “Indenture”) with respect to the Notes with U.S. Bank N.A., as trustee (the “Trustee”). The Notes are senior unsecured obligations of the Company and bear interest at an annual rate of 2.00% payable semi-annually in
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
arrears on April 15 and October 15 of each year, beginning on October 15, 2019. The Notes will mature on April 15, 2024, unless earlier repurchased or converted in accordance with their terms.
The Notes are convertible in certain circumstances into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 38.7879 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $25.78 per share, subject to adjustment upon the occurrence of certain events. In connection with the increase to the quarterly cash dividend announced on November 23, 2021, the Company adjusted the conversion rate and the conversion price of the convertible senior notes in accordance with the terms of the indenture governing the convertible senior notes, effective as of December 7, 2021. Prior to November 15, 2023, the Notes are convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes. Following certain corporate events described in the Indenture that occur prior to the maturity date, the conversion rate will be increased for a holder who elects to convert its Notes in connection with such corporate event in certain circumstances. The Notes are not redeemable prior to maturity, and no sinking fund is provided for the Notes. As of January 29, 2022, none of the conditions allowing holders of the Notes to convert had been met. The Company expects to settle the principal amount of the Notes in 2024 in cash and any excess in shares.
If the Company undergoes a “fundamental change,” as defined in the Indenture, subject to certain conditions, holders of the Notes may require the Company to purchase for cash all or any portion of their Notes. The fundamental change purchase price will be 100% of the principal amount of the Notes to be purchased plus any accrued and unpaid interest up to but excluding the fundamental change purchase date.
The Indenture contains certain other customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% in principal amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest on, all the Notes to be due and payable.
The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 6.8% over the term of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. During the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020, the Company recorded $11.1 million, $10.4 million and $7.6 million of interest expense related to the amortization of the debt discount, respectively.
Debt issuance costs related to the Notes were comprised of discounts and commissions payable to the initial purchasers of $3.8 million and third-party offering costs of approximately $1.5 million.
During the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020, the Company recorded $0.9 million, $0.9 million and $0.7 million related to the amortization of debt issuance costs, respectively. Debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Notes consist of the following components at (in thousands):
| | | | | | | | | | | |
| Year Ended Jan 29, 2022 | | Year Ended Jan 30, 2021 |
Liability component: | | | |
Principal | $ | 300,000 | | | $ | 300,000 | |
Unamortized debt discount | (27,498) | | | (38,623) | |
Unamortized issuance costs | (1,907) | | | (2,763) | |
Net carrying amount | $ | 270,595 | | | $ | 258,614 | |
| | | |
Equity component, net1 | $ | 42,320 | | | $ | 42,320 | |
1Included in paid-in capital within stockholders’ equity on the consolidated balance sheets and is net of debt issuance costs and deferred taxes.
As of January 29, 2022 and January 30, 2021, the fair value of the Notes, net of unamortized debt discount and issuance costs, was approximately $303.1 million and $303.5 million, respectively. The fair value of the Notes is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy.
Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the Notes, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 11.6 million shares of its common stock at a price of approximately $25.78 per share, in each case subject to adjustment in certain circumstances. The total cost of the convertible note hedge transactions was $61.0 million. In addition, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 11.6 millionshares of the Company’s common stock at a price of $46.88per share. Both the number of shares underlying the convertible note hedges and warrants and the strike price of the instruments are subject to customary adjustments. In connection with the increase to the quarterly cash dividend announced on November 23, 2021, an adjustment has been made to the strike prices with respect to the convertible note hedges and the warrants, each of which will be decreased in accordance with the terms of the convertible note hedge confirmations and warrant confirmations, respectively. The Company received $28.1 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset dilution from the conversion of the Notes by effectively increasing the overall conversion price from $25.78 per share to $46.88 per share. The warrant transaction may have a dilutive effect with respect to the Company’s common stock to the extent the market price per share of the Company’s common stock exceeds the strike price of the warrants. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period.
As of January 29, 2022 and January 30, 2021, the Company had a deferred income tax liability of $6.2 million and $8.8 million in connection with the debt discount associated with the Notes and a deferred income tax asset of $6.9 million and $9.7 million in connection with the convertible note hedge transaction, respectively. The net deferred income tax impact was included in deferred income tax assets on the Company’s consolidated balance sheets.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Stockholders’ Equity
Dividends
The following sets forth the cash dividend declared per share:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | Year Ended | | Year Ended |
| | | | | Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Cash dividend declared per share | | | | | $ | 0.5625 | | | $ | 0.2250 | | | $ | 0.5625 | |
During the first quarter of fiscal 2020, the Company announced that its Board of Directors reduced the future quarterly cash dividends that may be paid to holders of the Company’s common stock, when, and if any such dividend is declared by the Company’s Board of Directors, from $0.225 per share to $0.1125 per share to redeploy capital and return incremental value to shareholders through share repurchases. During the first quarter of fiscal 2021, the Company announced that its Board of Directors had deferred the decision with respect to the payment of its quarterly cash dividend. The Board of Directors decided to continue to postpone its decision with respect to the payment of its quarterly cash dividend during the second quarter of fiscal 2021 in order to preserve the Company’s cash position and provide continued financial flexibility in light of the uncertainties related to the COVID-19 pandemic. The Company announced that it would resume paying its quarterly cash dividend of $0.1125 per share beginning in the third quarter of fiscal 2021, but decided to not declare any cash dividends for the first and second quarters of fiscal 2021. On November 23, 2021, the Company announced an increase to its regular quarterly cash dividend from $0.1125 to $0.225 per share on the Company’s common stock. In connection with the increase to the quarterly cash dividend, the Company adjusted the conversion rate and the conversion price of the convertible senior notes in accordance with the terms of the indenture governing the convertible senior notes, effective as of December 7, 2021.
For each of the periods presented, dividends paid also included the impact from vesting of restricted stock units that are considered non-participating securities and are only entitled to dividend payments once the respective awards vest.
Decisions on whether, when and in what amounts to continue making any future dividend distributions will remain at all times entirely at the discretion of the Company’s Board of Directors, which reserves the right to change or terminate the Company’s dividend practices at any time and for any reason without prior notice. The payment of cash dividends in the future will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions and U.S. and global liquidity.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss), net of related income taxes, for fiscal 2018, fiscal 2017 and fiscal 2016 are as follows (in thousands):
| | | | | | | | | | | | | | Foreign Currency Translation Adjustment | | Derivative Financial Instruments Designated as Cash Flow Hedges | | Defined Benefit Plans | | Total |
| Foreign Currency Translation Adjustment | | Derivative Financial Instruments Designated as Cash Flow Hedges | | Marketable Securities | | Defined Benefit Plans | | Total | |
Balance at January 31, 2015 | $ | (121,569 | ) | | $ | 7,157 |
| | $ | (3 | ) | | $ | (12,650 | ) | | $ | (127,065 | ) | |
Gains (losses) arising during the period | (36,083 | ) | | 7,944 |
| | (12 | ) | | 5,468 |
| | (22,683 | ) | |
Reclassification to net earnings for gains realized | — |
| | (7,849 | ) | | — |
| | (457 | ) | | (8,306 | ) | |
Net other comprehensive income (loss) | (36,083 | ) | | 95 |
| | (12 | ) | | 5,011 |
| | (30,989 | ) | |
Balance at January 30, 2016 | $ | (157,652 | ) | | $ | 7,252 |
| | $ | (15 | ) | | $ | (7,639 | ) | | $ | (158,054 | ) | |
Balance at February 2, 2019 | | Balance at February 2, 2019 | $ | (119,546) | | | $ | 2,999 | | | $ | (9,632) | | | $ | (126,179) | |
Gains (losses) arising during the period | (575 | ) | | 1,059 |
| | (1 | ) | | (1,162 | ) | | (679 | ) | Gains (losses) arising during the period | (17,743) | | | 8,316 | | | 342 | | | (9,085) | |
Reclassification to net earnings for (gains) losses realized | — |
| | (2,911 | ) | | 16 |
| | 239 |
| | (2,656 | ) | Reclassification to net earnings for (gains) losses realized | — | | | (6,996) | | | 369 | | | (6,627) | |
Net other comprehensive income (loss) | (575 | ) | | (1,852 | ) | | 15 |
|
| (923 | ) | | (3,335 | ) | Net other comprehensive income (loss) | (17,743) | | | 1,320 | | | 711 | | | (15,712) | |
Balance at January 28, 2017 | $ | (158,227 | ) | | $ | 5,400 |
| | $ | — |
|
| $ | (8,562 | ) | | $ | (161,389 | ) | |
Cumulative adjustment reclassified to retained earnings from adoption of new accounting guidance1 | | Cumulative adjustment reclassified to retained earnings from adoption of new accounting guidance1 | — | | | 1,981 | | | — | | | 1,981 | |
Balance at February 1, 2020 | | Balance at February 1, 2020 | $ | (137,289) | | | $ | 6,300 | | | $ | (8,921) | | | $ | (139,910) | |
Gains (losses) arising during the period | 91,178 |
| | (20,408 | ) | | — |
| | (1,999 | ) | | 68,771 |
| Gains (losses) arising during the period | 31,319 | | | (5,709) | | | (1,203) | | | 24,407 | |
Reclassification to net loss for (gains) losses realized | — |
| | 414 |
| | — |
| | 352 |
| | 766 |
| Reclassification to net loss for (gains) losses realized | — | | | (5,467) | | | 295 | | | (5,172) | |
Net other comprehensive income (loss) | 91,178 |
| | (19,994 | ) | | — |
| | (1,647 | ) | | 69,537 |
| Net other comprehensive income (loss) | 31,319 | | | (11,176) | | | (908) | | | 19,235 | |
Cumulative adjustment reclassified to retained earnings from adoption of new accounting guidance (1) | — |
| | 225 |
| | — |
| | (1,435 | ) | | (1,210 | ) | |
Balance at February 3, 2018 | $ | (67,049 | ) | | $ | (14,369 | ) | | $ | — |
| | $ | (11,644 | ) | | $ | (93,062 | ) | |
Balance at January 30, 2021 | | Balance at January 30, 2021 | $ | (105,970) | | | $ | (4,876) | | | $ | (9,829) | | | $ | (120,675) | |
Gains (losses) arising during the period | | Gains (losses) arising during the period | (29,891) | | | 10,121 | | | 2,550 | | | (17,220) | |
Reclassification to net earnings for losses realized | | Reclassification to net earnings for losses realized | — | | | 2,035 | | | 311 | | | 2,346 | |
Net other comprehensive income (loss) | | Net other comprehensive income (loss) | (29,891) | | | 12,156 | | | 2,861 | | | (14,874) | |
| Balance at January 29, 2022 | | Balance at January 29, 2022 | $ | (135,861) | | | $ | 7,280 | | | $ | (6,968) | | | $ | (135,549) | |
| |
(1) | During the fourth quarter of fiscal 2018, the Company early adopted authoritative guidance which addresses certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the Tax Reform enacted in December 2017. As a result, the Company recorded a cumulative adjustment to increase retained earnings by $1.2 million with a corresponding reduction to accumulated other comprehensive income (loss) related to the Company’s Supplemental Executive Retirement Plan and its interest rate swap designated as a cash flow hedge based in the U.S.
|
1During the first quarter of fiscal 2020, the Company adopted new authoritative guidance which eliminated the requirement to separately measure and report ineffectiveness for instruments that qualify for hedge accounting and generally requires that the entire change in the fair value of such instruments ultimately be presented in the same line as the respective hedge item. As a result, there is no interest component recognized for the ineffective portion of instruments that qualify for hedge accounting, but rather all changes in the fair value of such instruments are included in other comprehensive income (loss) beginning with fiscal 2020. Upon adoption of this guidance, the Company reclassified approximately $2.0 million in gains from retained earnings to accumulated other comprehensive loss related to the previously recorded interest component on outstanding instruments that qualified for hedge accounting.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Details on reclassifications out of accumulated other comprehensive income (loss) to net earnings (loss) during fiscal 2018, fiscal 2017 and fiscal 2016 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Location of (Gain) Loss Reclassified from Accumulated OCI into Earnings (Loss) |
| Year Ended Jan 29, 2022 | | Year Ended Jan 30, 2021 | | Year Ended Feb 1, 2020 | |
Derivative financial instruments designated as cash flow hedges: | | | | | | | |
Foreign exchange currency contracts | $ | 2,051 | | | $ | (6,298) | | | $ | (7,776) | | | Cost of product sales |
| | | | | | | |
Interest rate swap | 272 | | | 181 | | | (128) | | | Interest expense |
Less income tax effect | (288) | | | 650 | | | 908 | | | Income tax expense (benefit) |
| 2,035 | | | (5,467) | | | (6,996) | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Defined benefit plans: | | | | | | | |
Net actuarial loss amortization | 420 | | | 397 | | | 446 | | | Other income (expense) |
Prior service credit amortization | (67) | | | (66) | | | (39) | | | Other income (expense) |
Less income tax effect | (42) | | | (36) | | | (38) | | | Income tax expense (benefit) |
| 311 | | | 295 | | | 369 | | | |
Total reclassifications to net earnings (loss) for (gains) losses realized during the period | $ | 2,346 | | | $ | (5,172) | | | $ | (6,627) | | | |
|
| | | | | | | | | | | | | |
| | | | | | | Location of (Gain) Loss Reclassified from Accumulated OCI into Earnings (Loss) |
| Year Ended Feb 3, 2018 | | Year Ended Jan 28, 2017 | | Year Ended Jan 30, 2016 | |
Derivative financial instruments designated as cash flow hedges: | | | | | | | |
Foreign exchange currency contracts | $ | (14 | ) | | $ | (3,518 | ) | | $ | (8,314 | ) | | Cost of product sales |
Foreign exchange currency contracts | 583 |
| | (301 | ) | | (833 | ) | | Other income/expense |
Interest rate swap | 87 |
| | 216 |
| | — |
| | Interest expense |
Less income tax effect | (242 | ) | | 692 |
| | 1,298 |
| | Income tax expense |
| 414 |
| | (2,911 | ) | | (7,849 | ) | | |
Marketable securities: | | | | | | | |
Available-for-sale securities | — |
| | 25 |
| | — |
| | Other income/expense |
Less income tax effect | — |
| | (9 | ) | | — |
| | Income tax expense |
| — |
| | 16 |
| | — |
| | |
Defined benefit plans: | | | | | | | |
Net actuarial loss amortization | 462 |
| | 341 |
| | 924 |
| | (1) |
Prior service credit amortization | (27 | ) | | (28 | ) | | (97 | ) | | (1) |
Curtailment | — |
| | — |
| | (1,651 | ) | | (1) |
Less income tax effect | (83 | ) | | (74 | ) | | 367 |
| | Income tax expense |
| 352 |
| | 239 |
| | (457 | ) | | |
Total reclassifications to net earnings (loss) for (gains) losses realized during the period | $ | 766 |
| | $ | (2,656 | ) | | $ | (8,306 | ) | | |
| |
(1) | These accumulated other comprehensive income (loss) components are included in the computation of net periodic defined benefit pension cost. Refer to Note 12 for further information.
|
(11)(12) Income Taxes
ChangesIntra-Entity Transaction
During the third quarter of fiscal 2022, the Company completed an intra-entity transfer of intellectual property rights from a U.S. entity to a wholly-owned Swiss subsidiary, more closely aligning the Company’s intellectual property rights with its business operations. This transaction resulted in Tax Law
In December 2017, the 2017 Tax Cuts and Jobs Acta taxable gain in the U.S. (referred to herein asThe U.S. taxable gain generated by this intercompany transfer of intellectual property was primarily offset by the “Tax Reform”), was enacted into law. The Tax Reform includes significant changes to the U.S. corporaterecognition of a deferred income tax system, including a reductionasset in the U.S. federal corporate income tax rate from 35% to 21% and a one-time mandatory transition tax on accumulated foreign earnings.Swiss subsidiary.
The Tax Reform also establishes new tax laws that will be effective for calendar 2018, including but not limited to (i)intra-entity transfer of intellectual property rights resulted in a new provision designed to tax global intangible low-taxed income (“GILTI”), (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, (iii) a limitation on deductible interest expense and (iv) limitations on the deductibility of certain executive compensation.
The Securities and Exchange Commission (“SEC”) issued authoritative guidance which addresses accounting for the impact of the Tax Reform. This guidance provides a measurement period, which should not extend beyond one year from the enactment date, during which the Company may finalize the accounting for the impacts of the Tax Reform, and allows for the Company to record provisional estimates of such amounts. As a result, during fiscal 2018, the Company recorded estimated additional income tax expense of $47.9approximately $106 million. This is comprisedThe U.S. income tax expense generated by this intercompany transfer of intellectual property was substantially offset by the recognition of a provisional chargedeferred income tax asset in the Swiss subsidiary of $24.9 millionapproximately $102 million. The net impact to the Company’s income tax expense for this transaction was approximately $4 million.
For the re-measurement of U.S. deferred tax assets and a provisional charge of $23.0 million for the estimated effectsintra-entity transfer of the intellectual property rights, the Company made U.S. income tax payments of $107.2 million. The Company estimates it will take between 5 and 10 years to amortize the Swiss deferred income tax asset.
Changes in Income Tax Law
On March 27, 2020, the U.S. government enacted the CARES Act to provide economic relief from the COVID-19 pandemic. Among other provisions, the CARES Act allows for a full offset of taxable income in a five-year carryback period for net operating losses, which will reduce current period income tax expense and may result in a refund of previously paid income tax amounts at higher historical income tax rates. For the year ended January 30, 2021, the Company recognized an income tax benefit of $0.9 million related to the CARES Act.
During calendar 2019, Switzerland implemented income tax reform (“Swiss tax reform”) that was effective as of January 1, 2020. The Swiss tax reform eliminates certain preferential income tax treatments and includes transitional relief measures which provides for future income tax ondeductions. During the deemed repatriationfourth quarter of foreign earnings. The
fiscal 2020, the Company recognized a one-time income tax benefit of approximately $8.1 million related primarily to
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the recognition of a deferred income tax payable related toasset associated with the transitionestimated value of an income tax is due over an eight year period beginning in calendar 2018. The amount that is payable in the next 12 months is approximately $1.9 million and has been included in accrued expenses inbasis step-up of the Company’s consolidated balance sheet. Switzerland subsidiary’s assets.
The Company has provided for any additional tax liabilities on amounts that are estimatedhistorically considered the undistributed earnings of its foreign subsidiaries to be repatriated from foreign operations asindefinitely reinvested. As a result of the Tax Reform. We have not provided for other income taxes on undistributed foreignReform, the Company had a substantial amount of previously taxed earnings expectedthat could be distributed to be reinvested outside the U.S. If in the future we decide to repatriate such earnings, we would incur other incremental taxes. Our current plans do not indicate a need to repatriate them to fund ourwithout additional U.S. cash requirements.
Based on the Company’s current interpretation of the Tax Reform, reasonable estimates were made to record provisional adjustments during fiscal 2018. These estimates may change, and the Company will continue to refine such amounts within the measurement period allowed. These estimates may be impacted by a number of additional considerations, including, but not limited to, the state level income tax impacts of the Tax Reform, clarifications of or changes to the Tax Reform (including the issuance of final regulations and evolving technical interpretations), additional guidance issued by the SEC or FASB, and the Company’s ongoing analysis of historical earnings and profits as well as tax pools.taxation. The Company continues to analyzeevaluate its plans for reinvestment or repatriation of unremitted foreign earnings and regularly reviews its cash positions and determination of permanent reinvestment of foreign earnings. As of January 29, 2022, the provisionsCompany determined approximately $7.4 million of such foreign earnings are no longer indefinitely reinvested. The incremental income tax cost to repatriate these earnings to the U.S. is immaterial. The Company intends to indefinitely reinvest the remaining earnings from the Company’s foreign subsidiaries for which a deferred income tax liability has not already been recorded. It is not practicable to estimate the amount of income tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation.
Income Tax Settlement
In connection with an income tax audit in Italy, the Italian tax authority indicated it believed certain dividend distributions made in fiscal years 2015 and 2016 from the Company’s Italian subsidiaries to their European parent holding company should be subject to certain withholding taxes in Italy. While the Company disagreed with the position of the Tax Reform, including but not limitedItalian tax authority and was prepared to vigorously defend itself in this matter, the creation ofCompany continued to work with the Italian tax authority in an attempt to resolve the dispute through standard tax resolution processes. In December 2019, to avoid a new minimumpotentially long and costly litigation process, the Company reached an agreement with the Italian tax calledauthority to settle the base erosion anti-abuse tax;matter for €9.9 million ($11.1 million) (including interest), to be paid in 16 equal quarterly installments starting in December 2019. As a new provision that taxes U.S. allocated expenses (e.g. interest and general administrative expenses) as well as certain GILTI from foreign operations; a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; a new limitation on deductible interest expense; and limitations on the deductibility of certain employee compensation. Under GAAP, companies are allowed to make an accounting policy election to either treat taxes resulting from GILTI as a current-period expense when they are incurred or factor such amounts into the measurement of deferred taxes. The Company has not completed its analysisresult of the effectsagreement, the Company recorded a charge to income tax expense of the GILTI provisions and will further consider the accounting policy election within the measurement period allowed.
During€7.0 million ($7.8 million) (net of related offsets in other income tax jurisdictions) during the fourth quarter of fiscal 2018,2020. As of January 29, 2022, the Company also early adopted authoritative guidance which addresses certain stranded income tax effectshad recorded €2.5 million ($2.8 million) and €2.5 million ($2.8 million) in accumulatedaccrued expenses and other comprehensive income (loss) resulting fromlong-term liabilities, respectively, in the Tax Reform.accompanying balance sheets. As a result,of January 30, 2021, the Company had recorded a cumulative adjustment of $1.2€2.4 million to reclassify($3.2 million) and €5.0 million ($6.1 million) in accrued expenses and other long-term liabilities, respectively, in the stranded income tax effects from the Tax Reform that were included in accumulated other comprehensive income (loss) to retained earnings.accompanying consolidated balance sheets.
Income Tax Expense
Income tax expense (benefit) is summarized as follows (in thousands):
| | | Year Ended | | Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 | | Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Federal: | | | | | | Federal: | | | | | |
Current | $ | 34,181 |
| | $ | 8,212 |
| | $ | 23,618 |
| Current | $ | 149,811 | | | $ | (2,390) | | | $ | 9,270 | |
Deferred | 21,595 |
| | (636 | ) | | 4,038 |
| Deferred | 9,859 | | | (5,274) | | | 2,263 | |
State: | | | | | | State: | | | | | |
Current | 1,903 |
| | 2,537 |
| | 3,864 |
| Current | 10,433 | | | 248 | | | 1,622 | |
Deferred | 217 |
| | (1,000 | ) | | (296 | ) | Deferred | 2,443 | | | (598) | | | 1,699 | |
Foreign: | | | | | | Foreign: | | | | | |
Current | 7,333 |
| | 17,055 |
| | 14,259 |
| Current | 13,592 | | | 8,285 | | | 17,166 | |
Deferred | 8,943 |
| | 2,044 |
| | (3,019 | ) | Deferred | (112,458) | | | (6,609) | | | (9,507) | |
Total | $ | 74,172 |
| | $ | 28,212 |
| | $ | 42,464 |
| Total | $ | 73,680 | | | $ | (6,338) | | | $ | 22,513 | |
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Actual income tax expense (benefit) differs from expected income tax expense (benefit) obtained by applying the statutory federal income tax rate to earnings before income taxes as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Computed “expected” tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State taxes, net of federal benefit | 1.6 | % | | 1.2 | % | | 3.0 | % |
Non-U.S. tax expense higher than federal statutory tax rate1 | (2.4 | %) | | 9.1 | % | | 0.0 | % |
Tax Reform - repatriation tax adjustment | 0.2 | % | | — | % | | — | % |
| | | | | |
SERP/TOLI | (0.1 | %) | | 1.9 | % | | (1.5 | %) |
Non-deductible participation loss | 1.8 | % | | 3.6 | % | | — | % |
| | | | | |
Swiss tax reform2 | — | % | | — | % | | (6.5 | %) |
| | | | | |
Valuation reserve3 | 0.7 | % | | (26.9 | %) | | (0.2 | %) |
Intra-entity intellectual property transfer tax rate difference4 | 1.6 | % | | — | % | | — | % |
Unrecognized tax liabilities (benefits) | (0.6 | %) | | (6.6 | %) | | (6.2 | %) |
Share-based compensation | (0.4 | %) | | 1.8 | % | | 0.9 | % |
Net tax settlements | — | % | | — | % | | 9.1 | % |
Prior year tax adjustments | 0.4 | % | | 1.3 | % | | (1.8 | %) |
Non-deductible permanent differences | 0.6 | % | | 0.4 | % | | 2.1 | % |
Foreign derived intangible income5 | (1.5 | %) | | — | % | | (3.4 | %) |
Subpart F Income | 4.5 | % | | — | % | | — | % |
GILTI | 0.6 | % | | — | % | | — | % |
Other | 1.0 | % | | 0.5 | % | | 1.7 | % |
Effective income tax rate | 29.0 | % | | 7.3 | % | | 18.2 | % |
1The jurisdictional location of pre-tax income (loss) may represent a significant component of the Company’s effective income tax rate as earnings (loss) in foreign jurisdictions are taxed at rates that are different from the U.S. statutory income tax rate. These amounts exclude the impact of net changes in valuation allowances, audit and other adjustments related to the Company’s non-U.S. operations, as they are reported separately in the appropriate corresponding line items above.
2During fiscal 2020, the Company recognized additional income tax benefits resulting from the enactment of the Swiss tax reform. The additional income tax benefits related primarily to the recognition of a deferred income tax asset associated with the estimated value of an income tax basis step-up of the Company’s Switzerland subsidiary’s assets.
3Amounts relate primarily to valuation reserves on net operating losses, other deferred income tax assets arising during the respective period and valuation reserves resulting from jurisdictions where there have been cumulative net operating losses, limiting the Company’s ability to consider other subjective evidence to continue to recognize the existing deferred income tax assets.
4During fiscal 2022, the Company completed an intra-entity transfer of intellectual property rights from a U.S. entity to a wholly-owned Swiss subsidiary, resulting in income tax rate difference of $4.0 million.
5During fiscal 2022, the Company recognized an additional foreign derived intangible income tax benefits of $37.0 million related to the intra-entity transfer of intellectual property rights.
Total income tax expense(benefit) is allocated as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 20201 |
Operations | $ | 73,680 | | | $ | (6,338) | | | $ | 22,513 | |
Stockholders’ equity | 2,264 | | | (1,534) | | | (1,142) | |
Total income tax expense (benefit) | $ | 75,944 | | | $ | (7,872) | | | $ | 21,371 | |
1In April 2019, the Company issued the Notes in a private offering. Paid-in capital includes $1.3 millionin net deferred income tax assets in connection with the related convertible note hedge transactions and debt discount associated with the Notes. Refer to Notes 2 and 10 for more information on the convertible senior notes and related transactions.
|
| | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 |
Computed “expected” tax expense | $ | 23,693 |
| | $ | 18,763 |
| | $ | 44,547 |
|
State taxes, net of federal benefit | 1,675 |
| | 999 |
| | 2,320 |
|
Non-U.S. tax expense less than federal statutory tax rate (1) | (7,396 | ) | | (1,539 | ) | | (6,991 | ) |
Tax Reform - repatriation tax adjustment (2) | 23,034 |
| | — |
| | — |
|
Tax Reform - deferred tax adjustment (2) | 24,856 |
| | — |
| | — |
|
Cumulative valuation reserve (3) | — |
| | 6,830 |
| | — |
|
Valuation reserve (4) | 9,057 |
| | 5,841 |
| | 3,024 |
|
Unrecognized tax benefit | 537 |
| | 556 |
| | 1,123 |
|
Share-based compensation (5) | 1,309 |
| | — |
| | — |
|
Net tax settlements | — |
| | 1,894 |
| | — |
|
Sale of minority interest investment | — |
| | (2,316 | ) | | — |
|
Estimated exit tax charge | — |
| | 1,911 |
| | — |
|
Prior year tax adjustments | (88 | ) | | (1,790 | ) | | (2,944 | ) |
Non-deductible permanent difference | (3,224 | ) | | (2,284 | ) | | 1,295 |
|
Other | 719 |
| | (653 | ) | | 90 |
|
Total | $ | 74,172 |
| | $ | 28,212 |
| | $ | 42,464 |
|
F-37 | |
(1) | The jurisdictional location of pre-tax income (loss) may represent a significant component of the Company’s effective tax rate as income tax rates outside the U.S. are generally lower than the U.S. statutory income tax rate. Furthermore, the impact of changes in the jurisdictional location of pre-tax income (loss) on the Company’s effective tax rate will be greater at lower levels of consolidated pre-tax income (loss). These amounts exclude the impact of net changes in valuation allowances, audit and other adjustments related to the Company’s non-U.S. operations, as they are reported separately in the appropriate corresponding line items in the table above. The impact on the Company’s effective tax rate was primarily related to the Company’s Swiss and Korean subsidiaries which have jurisdictional effective tax rates which range from 8% to 20% lower than the U.S. rates in effect for the periods presented. |
| |
(2) | During fiscal 2018, the Company recognized additional tax expense resulting from the enactment of the Tax Reform to account for the estimated effects of the transitional tax on the deemed repatriation of foreign earnings and reduced deferred tax assets due to lower future U.S. corporate tax rates. |
| |
(3) | Amounts represent valuation reserves resulting from jurisdictions where there have been cumulative net operating losses, limiting the Company’s ability to consider other subjective evidence to continue to recognize the existing deferred tax assets. |
| |
(4) | Amounts relate primarily to valuation reserves on non-cumulative net operating losses or other deferred tax assets arising during the respective period. |
| |
(5) | During fiscal 2018, the Company adopted authoritative guidance which requires all income tax effects of stock awards (resulting from an increase or decrease in the fair value of an award from grant date to the vesting date) to be recognized in the income statement when the awards vest or are settled. This is a change from previous guidance that required such activity to be recorded in paid-in capital within stockholders’ equity. |
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
TotalThe income tax expense(benefit) is allocated as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 |
Operations (1) | $ | 74,172 |
| | $ | 28,212 |
| | $ | 42,464 |
|
Stockholders’ equity (1) | (3,173 | ) | | 1,782 |
| | 4,668 |
|
Total income tax expense | $ | 70,999 |
| | $ | 29,994 |
| | $ | 47,132 |
|
| |
(1) | During fiscal 2018, the Company adopted authoritative guidance which requires all income tax effects of stock awards (resulting from an increase or decrease in the fair value of an award from grant date to the vesting date) to be recognized in the income statement when the awards vest or are settled. This is a change from previous guidance that required such activity to be recorded in paid-in capital within stockholders’ equity. As a result, the Company recorded tax shortfalls of approximately $1.3 million in the Company’s income tax expense during fiscal 2018. |
The tax effects of the components of other comprehensive income (loss) are allocated as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Derivative financial instruments designated as cash flow hedges | $ | 1,627 | | | $ | (1,387) | | | $ | 80 | |
Defined benefit plans | 637 | | | (147) | | | 68 | |
Total income tax expense (benefit) | $ | 2,264 | | | $ | (1,534) | | | $ | 148 | |
|
| | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 |
Derivative financial instruments designated as cash flow hedges | $ | (2,738 | ) | | $ | (864 | ) | | $ | 559 |
|
Marketable securities | — |
| | 6 |
| | (7 | ) |
Defined benefit plans | (435 | ) | | (21 | ) | | 2,972 |
|
Total income tax expense (benefit) (1) | $ | (3,173 | ) | | $ | (879 | ) | | $ | 3,524 |
|
| |
(1) | During the fourth quarter of fiscal 2018, the Company early adopted authoritative guidance which addresses certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the Tax Reform enacted in December 2017. As a result, the Company recorded a cumulative adjustment to increase retained earnings by $1.2 million with a corresponding reduction to accumulated other comprehensive income (loss) related to the Company’s Supplemental Executive Retirement Plan and its interest rate swap designated as a cash flow hedge based in the U.S. The impact from this reclassification on accumulated other comprehensive income (loss) has been excluded from the amounts provided in this table.
|
Total earnings (loss) before income tax expense (benefit) and noncontrolling interests are comprised of the followingas follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 |
Domestic operations | $ | 39,112 |
| | $ | 32,944 |
| | $ | 90,141 |
|
Foreign operations | 31,159 |
| | 20,666 |
| | 37,138 |
|
Earnings before income tax expense and noncontrolling interests | $ | 70,271 |
| | $ | 53,610 |
| | $ | 127,279 |
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | |
| Year Ended |
| Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Domestic operations | $ | 141,920 | | | $ | (27,984) | | | $ | 91,008 | |
Foreign operations | 111,809 | | | (59,095) | | | 32,734 | |
Earnings (loss) before income tax expense (benefit) and noncontrolling interests | $ | 253,729 | | | $ | (87,079) | | | $ | 123,742 | |
Deferred Income Taxes
The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and deferred tax liabilities are as of February 3, 2018 and January 28, 2017 are presented belowfollows (in thousands):
| | | Feb 3, 2018 | | Jan 28, 2017 | | Jan 29, 2022 | | Jan 30, 2021 |
Deferred tax assets: | | | | |
Deferred income tax assets: | | Deferred income tax assets: | | | |
Operating lease liabilities | | Operating lease liabilities | $ | 169,771 | | | $ | 193,789 | |
Intangible assets | | Intangible assets | 109,887 | | | — | |
Net operating losses | 19,859 |
| | 13,524 |
| Net operating losses | 38,583 | | | 38,117 | |
Defined benefit plans | 13,155 |
| | 20,642 |
| Defined benefit plans | 11,762 | | | 12,596 | |
Deferred compensation | 10,721 |
| | 12,987 |
| Deferred compensation | 7,632 | | | 7,877 | |
Convertible senior notes hedge transactions | | Convertible senior notes hedge transactions | 6,884 | | | 9,697 | |
Deferred income | | Deferred income | 5,771 | | | 6,258 | |
Goodwill amortization | | Goodwill amortization | 4,657 | | | 6,542 | |
Sales return and other reserves | | Sales return and other reserves | 2,710 | | | 1,988 | |
Accrued bonus | | Accrued bonus | 2,575 | | | 984 | |
Lease incentives | | Lease incentives | 1,918 | | | 2,187 | |
Excess of book over tax depreciation/amortization | 10,704 |
| | 9,018 |
| Excess of book over tax depreciation/amortization | 1,784 | | | 6,183 | |
Rent expense | 7,651 |
| | 13,672 |
| |
Deferred income | 7,141 |
| | 6,213 |
| |
Bad debt reserve | 2,529 |
| | 2,124 |
| |
Lease incentives | 1,814 |
| | 5,545 |
| |
Account receivable reserve | | Account receivable reserve | 1,780 | | | 2,520 | |
Inventory valuation | | Inventory valuation | 1,679 | | | 4,788 | |
Uniform capitalization | 974 |
| | 1,900 |
| Uniform capitalization | 1,004 | | | 756 | |
| Other | 30,703 |
| | 28,265 |
| Other | 13,826 | | | 13,538 | |
Total deferred tax assets | 105,251 |
| | 113,890 |
| |
Deferred tax liabilities: | | | | |
Goodwill amortization | (2,303 | ) | | (3,654 | ) | |
Excess of tax over book depreciation/amortization | (135 | ) | | (189 | ) | |
Other | (4,517 | ) | | (4,544 | ) | |
Total deferred income tax assets | | Total deferred income tax assets | 382,223 | | | 307,820 | |
Deferred income tax liabilities: | | Deferred income tax liabilities: | | | |
Operating right-of-use assets | | Operating right-of-use assets | (155,618) | | | (172,496) | |
Convertible senior notes debt discount | | Convertible senior notes debt discount | (6,207) | | | (8,776) | |
| Valuation allowance | (32,601 | ) | | (23,255 | ) | Valuation allowance | (55,278) | | | (54,131) | |
Net deferred tax assets (1) | $ | 65,695 |
| | $ | 82,248 |
| |
Net deferred income tax assets | | Net deferred income tax assets | $ | 165,120 | | | $ | 72,417 | |
| |
(1) | As of February 3, 2018, amount includes net deferred tax liabilities of $2.7 million recorded in other long-term liabilities in the Company’s consolidated balance sheet. There were $0.5 million net deferred tax liabilities recorded in other long-term liabilities in the Company’s consolidated balance sheet at January 28, 2017. |
Based on the historical earnings of the Company and projections of future taxable earnings in certain jurisdictions, management believes it is more likely than not that the results of operations will not generate sufficient taxable earnings to realize certain net deferred income tax assets. Therefore, the Company has recorded a valuation allowance of $32.6$55.3 million, which is an increase of $9.3$1.1 million from the prior year.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of February 3, 2018,January 29, 2022, certain of the Company’s operations had net operating loss carryforwards of $74.7 million.$45.8 million (income tax effected, not net of uncertain income tax positions), including state/provincial net operating loss carryforwards. These are comprised of $17.1$9.9 million (income tax effected, not net of uncertain income tax positions) of net operating loss carryforwards that havewith an unlimited carryforward life, $57.0$35.7 million (income tax effected, not net of uncertain income tax positions) of foreign net operating loss carryforwards that expireexpiring between fiscal 20192023 and fiscal 20382041 and $0.6$0.3 million (income tax effected) of statestate/provincial net operating loss carryforwards that expire betweenexpiring starting fiscal 20192023 and fiscal 2036.beyond. Based on the historical earnings of these operations, management believes that it is more likely than not that some of the operations will not generate sufficient earnings to utilize all of thethese net operating loss.losses. As of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, the Company had a valuation allowance of $20.4$39.8 million and $13.9$35.8 million, respectively, related to its net operating loss carryforwards.
Unrecognized Income Tax Benefit
The Company and its subsidiaries are subject to U.S. federal and foreign income tax, as well as income tax of multiple state and foreign local jurisdictions. From time-to-time, the Company is subject to routine income and other tax audits on various tax matters around the world in the ordinary course of business. Although
A reconciliation of the beginning and ending amount of gross unrecognized income tax benefit (excluding interest and penalties) is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Beginning balance | $ | 34,246 | | | $ | 29,183 | | | $ | 38,751 | |
Additions: | | | | | |
Tax positions related to the prior year | 280 | | | 110 | | | 3,074 | |
Tax positions related to the current year | 21,616 | | | 8,204 | | | 264 | |
Reductions: | | | | | |
Tax positions related to the prior year | (2,405) | | | (3,251) | | | (12,658) | |
Tax positions related to the current year | (2,001) | | | — | | | — | |
| | | | | |
| | | | | |
Foreign currency translation | — | | | — | | | (248) | |
Ending balance | $ | 51,736 | | | $ | 34,246 | | | $ | 29,183 | |
The amount of unrecognized income tax benefit as of January 29, 2022 and January 30, 2021 includes $33.1 million and $33.7 million (net of federal benefit on state issues), respectively, which, if ultimately recognized, may reduce our future annual effective income tax rate.
From time-to-time, the Company has substantially concluded all U.S. federal, foreign, stateis subject to routine income and foreign localother income tax audits on various income tax matters for years through fiscal 2012, asaround the world in the ordinary course of February 3, 2018, severalbusiness. As of January 29, 2022, no major income tax audits were underway in multiple jurisdictionsongoing.
As of January 29, 2022 and January 30, 2021, the Company had $57.5 million and $40.0 million, respectively, of aggregate accruals for various periods after fiscal 2012. The Company does not believe that the resolution of open matters will have a material effect on the Company’s financial position or liquidity.
The Company accrues an amount for its estimate of additionaluncertain income tax liability whichpositions, including penalties and interest. This includes an accrual of $19.9 million for the Company, more likely than not, will incur as a resultestimated transition tax (excluding interest related to the Tax Reform) and $20.6 million for the intra-entity transfer of intellectual property rights, substantially offset by the ultimate resolution ofrelated deferred income tax audits (“uncertain tax positions”).benefit, from a U.S. entity to a wholly-owned Swiss Subsidiary. The
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company reviews and updates the estimates used in the accrual for uncertain income tax positions, as appropriate, as more definitive information becomesor interpretations become available from income taxing authorities, uponand on the completion of income tax audits, uponthe receipt of assessments, expiration of statutes of limitation,limitations, or upon occurrence of other events.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefit (excluding interest and penalties) is as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 |
Beginning balance | $ | 12,983 |
| | $ | 12,585 |
| | $ | 13,640 |
|
Additions: | | | | | |
Tax positions related to the prior year | 4,436 |
| | 672 |
| | 496 |
|
Tax positions related to the current year | 222 |
| | 106 |
| | 1,516 |
|
Reductions: | | | | | |
Tax positions related to the prior year | (356 | ) | | (380 | ) | | (1,650 | ) |
Tax positions related to the current year | (309 | ) | | — |
| | (359 | ) |
Settlements | — |
| | — |
| | (505 | ) |
Expiration of statutes of limitation | (205 | ) | | — |
| | (553 | ) |
Ending balance | $ | 16,771 |
| | $ | 12,983 |
| | $ | 12,585 |
|
The amount of unrecognized tax benefit as of February 3, 2018 includes $17.4 million (net of federal benefit on state issues) which, if ultimately recognized, may reduce our future annual effective tax rate. As of February 3, 2018 and January 28, 2017, the Company had $19.0 million and $14.6 million, respectively, of aggregate accruals for uncertain tax positions, including penalties and interest.
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company included interest and penalties related to uncertain income tax positions of $0.5 million,a $0.2 million, $0.9 million and $0.6$2.2 million in net income tax expense for fiscal 2018, fiscal 2017years 2022, 2021 and fiscal 2016,2020, respectively. Total interest and penalties related to uncertain income tax positions was $2.2$5.7 million and $1.6$5.7 million for at January 29, 2022 and January 30, 2021, respectively.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the years ended February 3, 2018 and January 28, 2017, respectively.second quarter of fiscal 2021, the Company became aware of a foreign withholding income tax regulation that could be interpreted to apply to certain of its previous transactions. The Company currently does not expect its exposure, if any, will have a material impact on its consolidated financial position, results of operations or cash flows.
(12)(13) Defined Benefit Plans
The Company maintains defined benefit plans for certain employees primarily in the U.S. and Switzerland. In accordance with authoritative guidance for defined benefit pension and other postretirement plans, an asset for a plan’s overfundedover funded status or a liability for a plan’s underfunded status is recognized in the consolidated balance sheets; plan assets and obligations that determine the plan’s funded status are measured as of the end of the Company’s fiscal year; and changes in the funded status of defined benefit postretirement plans are recognized in the year in which they occur. Such changes are reported in other comprehensive income (loss) as a separate component of stockholders’ equity.
The Company’s pension obligations and related costs are calculated using actuarial concepts, within the authoritative guidance framework, and are considered Level 3 inputs as defined in Note 20.21. The Company uses the corridor approach to amortize unrecognized actuarial gains or losses over the average remaining service life of active participants. The life expectancy, estimated retirement age, discount rate, estimated future compensation and expected return on plan assets are important elements of expense and/or liability measurement. These critical assumptions are evaluated annually which enables expected future payments for benefits to be stated at present value on the measurement date. If actual results are not consistent with actuarial assumptions, the amounts recognized for the defined benefit plans could change significantly.
Supplemental Executive Retirement Plan
On August 23, 2005, the Board of Directors of the Company adopted a Supplemental Executive Retirement Plan (“SERP”) which became effective January 1, 2006. The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment, death, disability or a change in control of the Company, in certain prescribed circumstances.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In fiscal 2016, the SERP was amended in connection with Paul Marciano’s transition from Chief Executive Officer to Executive Chairman of the Board and Chief Creative Officer. This amendment effectively eliminated any future salary progression by finalizing compensation levels for future benefits. Mr. Marciano will continue to be eligible to receive SERP benefits in the future in accordance with the amended terms of the SERP. Subsequent to this amendment, there are no employees considered actively participating under the terms of the SERP. As a result, the Company included an actuarial gain of $11.4 million before taxes in accumulated other comprehensive income (loss) during fiscal 2016. In addition, the Company also recognized a curtailment gain of $1.7 million before taxes related to the accelerated amortization of the remaining prior service credit during fiscal 2016.
As a non-qualified pension plan, no dedicated funding of the SERP is required; however, the Company has made periodic payments into insurance policies held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP. The amount of any future payments into the insurance policies, if any, may vary depending on investment performance of the trust. The cash surrender values of the insurance policies were $64.5$70.9 million and $58.6$72.1 million as of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, respectively, and were included in other assets in the Company’s consolidated balance sheets. As a result of changes in the value of the insurance policy investments, the Company recorded unrealized gains (losses)of $7.7$0.6 million, $6.9$6.1 million and ($1.8) million in other income and expense during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The Company also recorded realized gains of $0.7$7.6 million in other income resulting from payout on the insurance policies(expense) during fiscal 2016.2022, fiscal 2021 and fiscal 2020, respectively.
The Company assumed a discount rate of approximately 3.5%2.8% and 2.3% for both of the years ended February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, respectively, as part of the actuarial valuation performed to calculate the projected benefit obligation, based on the timing of cash flows expected to be made in the future to the participants, applied to high quality yield curves. In fiscal 2016, the Company amended the SERP to effectively eliminate any future salary progression by finalizing compensation levels for future benefits. Prior to the amendment, compensation levels utilized in calculating the projected benefit obligation were derived from expected future compensation as outlined in employment contracts in effect at the time. The Company also considers recent updates to the mortality tables and mortality improvement scale published by the Society of Actuaries in developing its best estimate of the expected mortality rates for its plan participants.
As of February 3, 2018, accumulated other comprehensive income (loss) included actuarial losses of $0.2 million that are expected to be amortized and recognized as a component of net periodic defined benefit pension cost in fiscal 2019. Aggregate benefits projected to be paid in the next five fiscal years are approximately $1.7$1.9 million in fiscal 2019,2023, $1.8 million in fiscal 2024, $3.8 million in fiscal 2025, $3.7 million in fiscal 2020, $3.92026 and $3.7 million in fiscal 2021, $3.9 million in fiscal 2022 and $3.9 million in fiscal 2023.2027. Aggregate benefits projected to be paid in the following five fiscal years following fiscal 2027 amount to $18.5$17.6 million.
Foreign Pension Plans
In certain foreign jurisdictions, primarily in Switzerland, the Company is required to guarantee the returns on Company sponsored defined contribution plans in accordance with local regulations. These plans are typically government-mandated defined contribution plans that provide employees with a minimum investment return, and
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
as such, are treated under pension accounting in accordance with authoritative guidance. The minimum investment return for our Swiss pension plan was 1.00% and 1.25%1.0% during calendar 20172021 and calendar 2016, respectively.2020. Under the Swiss pension plan, both the Company and certain of its employees with annual earnings in excess of government determined amounts are required to make contributions into a fund managed by an independent investment fiduciary. The Company’s contributions must be made in an amount at least equal to the employee’s contribution. Minimum employee contributions are based on the respective employee’s age, salary and gender.
During fiscal 2016, the Swiss pension plan was amended to update the conversion rate for future periods. As a result, the projected benefit obligation and prior service cost were reduced by $0.2 million during fiscal 2016.
As of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, actuarial assumptions used by the Company to calculate the projected benefit obligation and the fair value of the plans assets related to its Swiss pension plan included discount rates of 0.60%0.35% and 0.50%0.05%, respectively, and expected returns on plan assets of 1.40% for both periods.0.65% and 0.50%, respectively.
The components of net periodic defined benefit pension cost to accumulated other comprehensive income (loss) related to the Company’s defined benefit plans are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended January 29, 2022 |
| SERP | | Foreign Pension Plans | | Total |
Service cost | $ | — | | | $ | 3,142 | | | $ | 3,142 | |
Interest cost | 1,155 | | | 74 | | | 1,229 | |
Expected return on plan assets | — | | | (206) | | | (206) | |
Net amortization of unrecognized prior service credit | — | | | (67) | | | (67) | |
Net amortization of actuarial losses | 81 | | | 339 | | | 420 | |
| | | | | |
Net periodic defined benefit pension cost | $ | 1,236 | | | $ | 3,282 | | | $ | 4,518 | |
| | | | | |
Unrecognized prior service credit charged to comprehensive income (loss) | $ | — | | | $ | (67) | | | $ | (67) | |
Unrecognized net actuarial loss charged to comprehensive income (loss) | 81 | | | 339 | | | 420 | |
Net actuarial gains | 2,067 | | | 738 | | | 2,805 | |
Foreign currency and other adjustments | — | | | 340 | | | 340 | |
Related tax impact | (496) | | | (141) | | | (637) | |
Total periodic defined benefit pension cost and other charges to other comprehensive income (loss) and accumulated other comprehensive income (loss) | $ | 1,652 | | | $ | 1,209 | | | $ | 2,861 | |
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | |
| Year Ended January 30, 2021 |
| SERP | | Foreign Pension Plans | | Total |
Service cost | $ | — | | | $ | 3,155 | | | $ | 3,155 | |
Interest cost | 1,277 | | | 32 | | | 1,309 | |
Expected return on plan assets | — | | | (186) | | | (186) | |
Net amortization of unrecognized prior service credit | — | | | (66) | | | (66) | |
Net amortization of actuarial losses | 40 | | | 357 | | | 397 | |
Net periodic defined benefit pension cost | $ | 1,317 | | | $ | 3,292 | | | $ | 4,609 | |
| | | | | |
Unrecognized prior service credit charged to comprehensive income (loss) | $ | — | | | $ | (66) | | | $ | (66) | |
Unrecognized net actuarial loss charged to comprehensive income (loss) | 40 | | | 357 | | | 397 | |
Net actuarial losses | (767) | | | (236) | | | (1,003) | |
Foreign currency and other adjustments | — | | | (383) | | | (383) | |
Related tax impact | 168 | | | (21) | | | 147 | |
Total periodic defined benefit pension cost and other charges to other comprehensive income (loss) and accumulated other comprehensive income (loss) | $ | (559) | | | $ | (349) | | | $ | (908) | |
As of February 3, 2018, accumulated other comprehensive income (loss) included actuarial losses of $0.4 million that are expected to be amortized and recognized as a component of net periodic defined benefit pension cost in fiscal 2019.
The components of net periodic defined benefit pension cost to accumulated comprehensive income (loss) for fiscal 2018, fiscal 2017 and fiscal 2016 related to the Company’s defined benefit plans are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended February 3, 2018 |
| SERP | | Foreign Pension Plans | | Total |
Service cost | $ | — |
| | $ | 2,500 |
| | $ | 2,500 |
|
Interest cost | 1,844 |
| | 147 |
| | 1,991 |
|
Expected return on plan assets | — |
| | (244 | ) | | (244 | ) |
Net amortization of unrecognized prior service credit | — |
| | (27 | ) | | (27 | ) |
Net amortization of actuarial losses | 151 |
| | 311 |
| | 462 |
|
Net periodic defined benefit pension cost | $ | 1,995 |
| | $ | 2,687 |
|
| $ | 4,682 |
|
Unrecognized prior service credit charged to comprehensive income (loss) | $ | — |
| | $ | (27 | ) | | $ | (27 | ) |
Unrecognized net actuarial loss charged to comprehensive income (loss) | 151 |
| | 311 |
| | 462 |
|
Net actuarial losses | (1,092 | ) | | (1,156 | ) | | (2,248 | ) |
Foreign currency and other adjustments | — |
| | (269 | ) | | (269 | ) |
Related tax impact | 360 |
| | 75 |
| | 435 |
|
Total periodic defined benefit pension cost and other charges to other comprehensive income (loss) | (581 | ) | | (1,066 | ) | | (1,647 | ) |
Cumulative adjustment reclassified to retained earnings from adoption of new accounting guidance (1) | (1,435 | ) | | — |
| | (1,435 | ) |
Total periodic defined benefit pension cost and other charges to accumulated other comprehensive income (loss) | $ | (2,016 | ) | | $ | (1,066 | ) | | $ | (3,082 | ) |
| |
(1) | During the fourth quarter of fiscal 2018, the Company early adopted authoritative guidance which addresses certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the Tax Reform enacted in December 2017. As a result, the Company recorded a cumulative adjustment to increase retained earnings by $1.4 million with a corresponding reduction to accumulated other comprehensive income (loss) related to the Company’s SERP. |
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | |
| Year Ended January 28, 2017 |
| SERP | | Foreign Pension Plans | | Total |
Service cost | $ | — |
| | $ | 1,544 |
| | $ | 1,544 |
|
Interest cost | 1,839 |
| | 87 |
| | 1,926 |
|
Expected return on plan assets | — |
| | (185 | ) | | (185 | ) |
Net amortization of unrecognized prior service credit | — |
| | (28 | ) | | (28 | ) |
Net amortization of actuarial losses | 155 |
| | 186 |
| | 341 |
|
Net periodic defined benefit pension cost | $ | 1,994 |
| | $ | 1,604 |
|
| $ | 3,598 |
|
Unrecognized prior service credit charged to comprehensive income (loss) | $ | — |
| | $ | (28 | ) | | $ | (28 | ) |
Unrecognized net actuarial loss charged to comprehensive income (loss) | 155 |
| | 186 |
| | 341 |
|
Net actuarial gains (losses) | 63 |
| | (1,248 | ) | | (1,185 | ) |
Foreign currency and other adjustments | — |
| | (72 | ) | | (72 | ) |
Related tax impact | (84 | ) | | 105 |
| | 21 |
|
Total periodic defined benefit pension cost and other charges to other comprehensive income (loss) and accumulated other comprehensive income (loss) | $ | 134 |
| | $ | (1,057 | ) |
| $ | (923 | ) |
|
| | | | | | | | | | | |
| Year Ended January 30, 2016 |
| SERP | | Foreign Pension Plans | | Total |
Service cost | $ | — |
| | $ | 1,622 |
| | $ | 1,622 |
|
Interest cost | 1,986 |
| | 69 |
| | 2,055 |
|
Expected return on plan assets | — |
| | (142 | ) | | (142 | ) |
Net amortization of unrecognized prior service credit | (97 | ) | | — |
| | (97 | ) |
Net amortization of actuarial losses | 740 |
| | 184 |
| | 924 |
|
Curtailment gain | (1,651 | ) | | — |
| | (1,651 | ) |
Net periodic defined benefit pension cost | $ | 978 |
| | $ | 1,733 |
| | $ | 2,711 |
|
Unrecognized prior service credit charged to comprehensive income (loss) | $ | (97 | ) | | $ | — |
| | $ | (97 | ) |
Unrecognized net actuarial loss charged to comprehensive income (loss) | 740 |
| | 184 |
| | 924 |
|
Curtailment gain | (1,651 | ) | | — |
| | (1,651 | ) |
Net actuarial gains (losses) | 8,707 |
| | (341 | ) | | 8,366 |
|
Plan amendment | — |
| | 167 |
| | 167 |
|
Foreign currency and other adjustments | — |
| | 274 |
| | 274 |
|
Related tax impact | (2,945 | ) | | (27 | ) | | (2,972 | ) |
Total periodic defined benefit pension cost and other charges to other comprehensive income (loss) and accumulated other comprehensive income (loss) | $ | 4,754 |
| | $ | 257 |
| | $ | 5,011 |
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | |
| Year Ended February 1, 2020 |
| SERP | | Foreign Pension Plans | | Total |
Service cost | $ | — | | | $ | 3,211 | | | $ | 3,211 | |
Interest cost | 1,924 | | | 270 | | | 2,194 | |
Expected return on plan assets | — | | | (310) | | | (310) | |
Net amortization of unrecognized prior service credit | — | | | (39) | | | (39) | |
Net amortization of actuarial losses | 62 | | | 384 | | | 446 | |
Net periodic defined benefit pension cost | $ | 1,986 | | | $ | 3,516 | | | $ | 5,502 | |
| | | | | |
Unrecognized prior service credit charged to comprehensive income (loss) | $ | — | | | $ | (39) | | | $ | (39) | |
Unrecognized net actuarial loss charged to comprehensive income (loss) | 62 | | | 384 | | | 446 | |
Net actuarial gains (losses) | 449 | | | (43) | | | 406 | |
Foreign currency and other adjustments | — | | | (34) | | | (34) | |
Related tax impact | (118) | | | 50 | | | (68) | |
Total periodic defined benefit pension cost and other charges to other comprehensive income (loss) and accumulated other comprehensive income (loss) | $ | 393 | | | $ | 318 | | | $ | 711 | |
Included in accumulated other comprehensive income (loss), before income tax, as of February 3, 2018 and January 28, 2017 are the following amounts that have not yet been recognized in net periodic defined benefit pension cost as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Jan 29, 2022 | | Jan 30, 2021 |
| SERP | | Foreign Pension Plans | | Total | | SERP | | Foreign Pension Plans | | Total |
Unrecognized prior service credit | $ | — | | | $ | (227) | | | $ | (227) | | | $ | — | | | $ | (161) | | | $ | (161) | |
Unrecognized net actuarial loss | 4,550 | | | 4,071 | | | 8,621 | | | 6,696 | | | 5,355 | | | 12,051 | |
Total included in accumulated other comprehensive loss | $ | 4,550 | | | $ | 3,844 | | | $ | 8,394 | | | $ | 6,696 | | | $ | 5,194 | | | $ | 11,890 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Feb 3, 2018 | | Jan 28, 2017 |
| SERP | | Foreign Pension Plans | | Total | | SERP | | Foreign Pension Plans | | Total |
Unrecognized prior service credit | $ | — |
| | $ | (113 | ) | | $ | (113 | ) | | $ | — |
| | $ | (140 | ) | | $ | (140 | ) |
Unrecognized net actuarial loss | 9,454 |
| | 4,889 |
| | 14,343 |
| | 8,513 |
| | 3,775 |
| | 12,288 |
|
Total included in accumulated other comprehensive loss | $ | 9,454 |
|
| $ | 4,776 |
|
| $ | 14,230 |
| | $ | 8,513 |
|
| $ | 3,635 |
|
| $ | 12,148 |
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the funded status of the Company’s defined benefit plans and the amounts recognized in the Company’s consolidated balance sheets are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| February 3, 2018 | | Jan 28, 2017 |
| SERP | | Foreign Pension Plans | | Total | | SERP | | Foreign Pension Plans | | Total |
Projected benefit obligation | $ | (54,760 | ) | | $ | (26,409 | ) | | $ | (81,169 | ) | | $ | (53,521 | ) | | $ | (19,986 | ) | | $ | (73,507 | ) |
Plan assets at fair value (1) | — |
| | 21,437 |
| | 21,437 |
| | — |
| | 16,305 |
| | 16,305 |
|
Net liability (2) | $ | (54,760 | ) |
| $ | (4,972 | ) |
| $ | (59,732 | ) | | $ | (53,521 | ) |
| $ | (3,681 | ) |
| $ | (57,202 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Jan 29, 2022 | | Jan 30, 2021 |
| SERP | | Foreign Pension Plans | | Total | | SERP | | Foreign Pension Plans | | Total |
Projected benefit obligation | $ | (49,431) | | | $ | (42,740) | | | $ | (92,171) | | | $ | (52,268) | | | $ | (41,461) | | | $ | (93,729) | |
Plan assets at fair value1 | — | | | 38,015 | | | 38,015 | | | — | | | 35,015 | | | 35,015 | |
Net liability2 | $ | (49,431) | | | $ | (4,725) | | | $ | (54,156) | | | $ | (52,268) | | | $ | (6,446) | | | $ | (58,714) | |
| |
(1) | The SERP is a non-qualified pension plan and hence the insurance policies are not considered to be plan assets. Accordingly, the table above does not include the insurance policies with cash surrender values of $64.5 million and $58.6 million as of February 3, 2018 and January 28, 2017, respectively.1The SERP is a non-qualified pension plan and hence the insurance policies are not considered to be plan assets. Accordingly, the table above does not include the insurance policies with cash surrender values of $70.9 million and $72.1 million as of January 29, 2022 and January 30, 2021, respectively. 2The net liability was included in accrued expenses and other long-term liabilities in the Company’s consolidated balance sheets depending on the expected timing of payments. |
| |
(2) | The net liability was included in accrued expenses and other long-term liabilities in the Company’s consolidated balance sheets depending on the expected timing of payments. |
A reconciliation of the changes in the projected benefit obligation for fiscal 2018 and fiscal 2017 is as follows (in thousands):
| | | | | | | | | | SERP | | Foreign Pension Plans | | Total |
Balance at February 1, 2020 | | Balance at February 1, 2020 | $ | 51,939 | | | $ | 34,779 | | | $ | 86,718 | |
Service cost | | Service cost | — | | | 3,165 | | | 3,165 | |
Interest cost | | Interest cost | 1,277 | | | 32 | | | 1,309 | |
Actuarial losses | | Actuarial losses | 767 | | | 286 | | | 1,053 | |
Contributions by plan participants | | Contributions by plan participants | — | | | 3,863 | | | 3,863 | |
Payments | | Payments | (1,715) | | | (3,421) | | | (5,136) | |
| Foreign currency and other adjustments | | Foreign currency and other adjustments | — | | | 2,757 | | | 2,757 | |
Balance at January 30, 2021 | | Balance at January 30, 2021 | $ | 52,268 | | | $ | 41,461 | | | $ | 93,729 | |
Service cost | | Service cost | — | | | 3,142 | | | 3,142 | |
Interest cost | | Interest cost | 1,155 | | | 74 | | | 1,229 | |
Actuarial gains | | Actuarial gains | (2,085) | | | (497) | | | (2,582) | |
Contributions by plan participants | | Contributions by plan participants | — | | | 3,764 | | | 3,764 | |
Payments | | Payments | (1,907) | | | (3,104) | | | (5,011) | |
| Projected Benefit Obligation | |
| SERP | | Foreign Pension Plans | | Total | |
Balance at January 30, 2016 | $ | 53,443 |
| | $ | 17,577 |
| | $ | 71,020 |
| |
Service cost | — |
| | 1,544 |
| | 1,544 |
| |
Interest cost | 1,839 |
| | 87 |
| | 1,926 |
| |
Actuarial (gains) losses | (63 | ) | | 1,067 |
| | 1,004 |
| |
Contributions by plan participants | — |
| | 1,805 |
| | 1,805 |
| |
Payments | (1,698 | ) | | (2,416 | ) | | (4,114 | ) | |
Foreign currency and other adjustments | — |
| | 322 |
| | 322 |
| Foreign currency and other adjustments | — | | | (2,100) | | | (2,100) | |
Balance at January 28, 2017 | $ | 53,521 |
|
| $ | 19,986 |
|
| $ | 73,507 |
| |
Service cost | — |
| | 2,500 |
| | 2,500 |
| |
Interest cost | 1,844 |
| | 147 |
| | 1,991 |
| |
Actuarial (gains) losses | 1,092 |
| | 1,156 |
| | 2,248 |
| |
Contributions by plan participants | — |
| | 2,315 |
| | 2,315 |
| |
Payments | (1,697 | ) | | (1,373 | ) | | (3,070 | ) | |
Foreign currency and other adjustments | — |
| | 1,678 |
| | 1,678 |
| |
Balance at February 3, 2018 | $ | 54,760 |
|
| $ | 26,409 |
|
| $ | 81,169 |
| |
Balance at January 29, 2022 | | Balance at January 29, 2022 | $ | 49,431 | | | $ | 42,740 | | | $ | 92,171 | |
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The SERP is a non-qualified pension plan and hence the insurance policies are not considered to be plan assets. Accordingly, the table below does not include the insurance policies with cash surrender values of $64.5$70.9 million and $58.6$72.1 million as of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, respectively. A reconciliation of the changes in plan assets for the Foreign Pension Plans for fiscal 2018 and fiscal 2017Company’s foreign pension plans is as follows (in thousands):
| | | | | |
| Plan Assets |
Balance at February 1, 2020 | $ | 28,893 | |
Actual return on plan assets | 247 | |
Contributions by employer | 3,184 | |
Contributions by plan participants | 3,863 | |
Payments | (3,421) | |
| |
Foreign currency and other adjustments | 2,249 | |
Balance at January 30, 2021 | $ | 35,015 | |
Actual return on plan assets | 447 | |
Contributions by employer | 3,582 | |
Contributions by plan participants | 3,764 | |
Payments | (3,104) | |
| |
Foreign currency and other adjustments | (1,689) | |
Balance at January 29, 2022 | $ | 38,015 | |
|
| | | |
| Plan Assets |
Balance at January 30, 2016 | $ | 14,859 |
|
Actual return on plan assets | 4 |
|
Contributions by employer | 1,779 |
|
Contributions by plan participants | 1,805 |
|
Payments | (2,416 | ) |
Foreign currency and other adjustments | 274 |
|
Balance at January 28, 2017 | $ | 16,305 |
|
Actual return on plan assets | 244 |
|
Contributions by employer | 2,575 |
|
Contributions by plan participants | 2,315 |
|
Payments | (1,373 | ) |
Foreign currency and other adjustments | 1,371 |
|
Balance at February 3, 2018 | $ | 21,437 |
|
(13)(14) Related Party Transactions
The Company and its subsidiaries periodically enter into transactions with other entities or individuals that are considered related parties, including certain transactions with entities owned by, affiliated with, trustsor for the respective benefit of Paul Marciano, who is an executive and member of the Board of the Company, and Maurice Marciano, Chairman Emeritus andwho is also a member of the Board, and certain of their children (the “Marciano Trusts”Entities”).
Leases
The Company leases warehouse and administrative facilities, including the Company’s North American corporate headquarters in Los Angeles, California, from partnerships affiliated with the Marciano TrustsEntities and certain of their affiliates. There were four4 of these leases in effect as of February 3, 2018January 29, 2022 with expiration or option exercise dates ranging from calendar years 20182023 to 2020.2030.
During the first quarter of fiscal 2022, the Company entered into a nine-year lease extension with the related party landlord for its existing office location in Paris, France, which includes a Company option for early termination at the end of the third and sixth years. The lease has standard terms with a quarterly base charge plus a variable charge aggregating approximately €0.9 million (US$1.0 million) per year (with subsequent annual rent adjustments based on a specified price index). All other material terms in the previously existing Paris lease remain the same.
During the second quarter of fiscal 2022, the Company throughentered into a wholly-owned Canadian subsidiary, leaseslease amendment with the related party landlord for its existing warehouse and administrative facilities in Montreal, Quebec from a partnership affiliated with the Marciano Trusts. During fiscal 2018, the Company exercised an option to extendQuebec. The amendment extended the lease term for an additional one-year period ending in December 2018.through August 2023 at a base rent of approximately CAD$0.6 million (US$0.5 million) per year. All other material terms ofin the previously existing Canada lease remain in full force and effect.the same.
The Company, through a French subsidiary, leases a showroom and office space located in Paris, France from an entity that is owned in part by an affiliate of the Marciano Trusts. Due to excess capacity, theAggregate lease was amended to reduce the square footage by approximately 5,100 square feet to 16,000 square feet during fiscal 2018. The amendment also provided for a corresponding reduction in aggregate rent, common area maintenance charges and property tax expense due to the lower square footage. All other terms of the existing lease remain in full force and effect.
In January 2016, the Company sold an approximately 140,000 square foot parking lot located adjacent to the Company’s corporate headquarters to a partnership affiliated with the Marciano Trusts for a sales price of $7.5 million, which was subsequently collected during fiscal 2017. Concurrent with the sale, the Company entered into a lease agreement to lease back the parking lot from the purchaser. During fiscal 2016, the Company recognized a net gain of approximately $3.4 million in other income as a result of these transactions.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate rent, common area maintenance charges and property tax expensecosts recorded under these fourthe 4 related party leases for fiscal 2018,2022, fiscal 20172021 and fiscal 20162020 were $4.9$8.5 million,, $5.0 $6.3 million and $5.1 million, respectively. The Company believes that the terms of the related party leases and parking lot sale have not been significantly affected by the fact that the Company and the lessors are related. Refer to Note 149 for more information on lease commitments.
Aircraft Arrangements
The Company periodically charters aircraft owned by MPM Financial, LLC (“MPM Financial”), an entity affiliated with the Marciano Trusts,Entities through informal arrangements with MPM Financialthe Marciano Entities and independent third partythird-party management companies contracted by MPM Financialsuch Marciano Entities to manage itstheir aircraft. The total fees paid under these arrangements for fiscal 2018,2022, fiscal 20172021 and fiscal 20162020 were approximately $1.1$3.5 million,, $0.9 $2.8 million and $0.6$0.4 million,, respectively.
Other Transactions
During 2015, Georges Marciano, brother of Paul Marciano and Maurice Marciano, filed lawsuits against the Company in Canada and the U.S. related primarily to intellectual property rights in the Marciano name. Armand Marciano, also a brother of Paul Marciano and Maurice Marciano, was later added as a plaintiff to the U.S. lawsuit. In addition to the lawsuits, Georges Marciano opposed various of the Company’s applications for registration of its “Marciano” mark. In December 2015, the parties (including all the Marciano brothers) entered into a settlement agreement and a coexistence agreement whereby: (1) Georges Marciano and Armand Marciano agreed to drop all claims and actions against the Company; (2) the Company agreed to pay Georges Marciano and Armand Marciano a sum of $100,000 each (which amounts were substantially reimbursed by insurance); (3) the Company clarified the intellectual property rights of Georges Marciano and Armand Marciano in the use of their respective full names; and (4) the parties clarified the Company’s ownership and intellectual property rights in the name “Marciano.”
(14) Commitments and Contingencies
Leases
The Company leases its showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under operating lease agreements expiring on various dates through October 2037. Some of these leases require the Company to make periodic payments for property taxes, utilities and common area operating expenses. Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from 4% to 20%, when specific sales volumes are exceeded. The Company’s concession leases also provide for rents primarily based upon a percentage of annual sales volume which average approximately 35% of annual sales volume. Some leases include lease incentives, rent abatements and fixed rent escalations, which are amortized and recorded over the initial lease term on a straight-line basis. The Company also leases some of its equipment under operating lease agreements expiring at various dates through November 2022.
As discussed in further detail in Note 8, the Company leases equipment as well as computer hardware and software under capital lease obligations.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Minority Investment
Future minimum propertyThe Company owns a 30% interest in a privately-held men’s footwear company (the “Footwear Company”) in which the Marciano Entities own a 45% interest. In December 2020, the Company provided the Footwear Company with a revolving credit facility for $2.0 million, which provides for an annual interest rate of 2.75% and equipment leasematures in November 2023. As of both January 29, 2022 and January 30, 2021, the Company had a note receivable of $0.2 million included in other assets in its consolidated balance sheet related to outstanding borrowings by the Footwear Company under this revolving credit facility.
Vendor Purchases
The Company purchases faux fur products from a privately-held fashion accessories company (the “Fashion Company”). Mr. Maurice Marciano, Mr. Paul Marciano and Mr. Carlos Alberini own on a combined basis 20% of the outstanding common equity interests in the Fashion Company (with the Marcianos jointly owning 16% and Mr. Alberini owning 4%). The total payments under capital leasesmade by the Company to the Fashion Company during fiscal 2022 was approximately $4.5 million. The Company believes that the price paid by the Company for the Fashion Company’s products and non-cancelable operating leasesthe terms of the transactions between the Company and the Fashion Company have not been affected by this passive investment of Messrs. Marcianos and Mr. Alberini in the Fashion Company.
Healthcare Claim Payments
In the fourth quarter of fiscal 2021, the Company discovered that, as part of February 3, 2018its self-funded medical insurance program covering employees of all of the Company’s U.S. entities, it had erroneously paid the medical expenses of the employees of certain entities controlled by Paul Marciano and Maurice Marciano (collectively the “Marciano Offices”) from approximately 2000 until October 2020. The incremental cost to the Company arising from paying the medical expenses of the employees of the Marciano Offices for fiscal 2021 and fiscal 2020 was approximately $671,000 and $700,000, respectively. For the five-year period from fiscal 2015 through fiscal 2019, the aggregate incremental cost was approximately $1.8 million. The Company estimates that the aggregate incremental cost for the 14-year period prior to fiscal 2015 was $2.1 million. The Company believes its estimation method fairly approximates the Company’s incremental cost of paying the medical expenses of the employees of the Marciano Offices for the years 2000 to 2013 in which actual employment and medical expense data for the employees of the Marciano Offices are not available. The Company had expensed all such amounts as follows (in thousands):part of its periodic recording of related medical claims.
|
| | | | | | | | | | | | | | | |
| | | Operating Leases | | |
| Capital Lease | | Non-Related Parties | | Related Parties | | Total |
Fiscal 2019 | $ | 2,940 |
| | $ | 196,321 |
| | $ | 4,757 |
| | $ | 204,018 |
|
Fiscal 2020 | 2,945 |
| | 174,521 |
| | 4,420 |
| | 181,886 |
|
Fiscal 2021 | 2,934 |
| | 148,255 |
| | 2,024 |
| | 153,213 |
|
Fiscal 2022 | 2,716 |
| | 124,562 |
| | — |
| | 127,278 |
|
Fiscal 2023 | 2,590 |
| | 100,162 |
| | — |
| | 102,752 |
|
Thereafter | 10,859 |
| | 229,880 |
| | — |
| | 240,739 |
|
Total minimum lease payments | $ | 24,984 |
| | $ | 973,701 |
| | $ | 11,201 |
| | $ | 1,009,886 |
|
Less interest | (6,395 | ) | | |
| | |
| | |
|
Capital lease obligations | $ | 18,589 |
| | |
| | |
| | |
|
Less current portion | (1,594 | ) | | |
| | |
| | |
|
Long-term capital lease obligations | $ | 16,995 |
| | |
| | |
| | |
|
RentalUpon becoming aware of the situation, the Company promptly discontinued covering the costs of the medical expenses of the employees of the Marciano Offices, and Paul Marciano and Maurice Marciano reimbursed the Company $2.7 million: (a) $1.9 million for the medical expenses of the employees of the Marciano Offices in fiscal 2021, fiscal 2020 and fiscal 2019, an amount equal to 100% of the aggregate incremental cost to the Company in those fiscal years plus accrued interest, and (b) $0.8 million for the medical expenses of the employees of the Marciano Offices for prior periods. The Company believes the out of period impacts to expense for all propertythe current and equipment operating leases duringprior years were immaterial, and therefore recorded the cumulative correction in the current year. The fact that the Marciano Offices may have realized lower overall expenses in connection with obtaining and administering medical insurance for the employees of the Marciano Offices may itself be considered a perquisite inadvertently provided by the Company to Paul Marciano and Maurice Marciano, but there was ultimately no associated incremental cost to the Company for providing that benefit in fiscal 2018,2022, fiscal 20172021 and fiscal 2016 aggregated $272.3 million, $263.1 million2020 because the Marciano’s either reimbursed the Company 100% of the aggregate incremental cost to the Company or paid the insurance provider directly in those fiscal years.
(15) Commitments and $259.1 million, respectively, including percentage rent of $61.2 million, $53.0 million and $53.7 million, respectively.Contingencies
Purchase Commitments
Inventory purchase commitments as of February 3, 2018January 29, 2022 were $208.1$258.6 million. These purchase commitments can be impacted by various factors, including the scheduling of market weeks, the timing of issuing orders, the timing of the shipment of orders and currency fluctuations.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Incentive Bonuses
Certain officers and key employees of the Company are eligible to receive annual cash incentive bonuses based on the achievement of certain performance criteria. These bonuses are based on performance measures such as earnings from operations of the Company or particular segments thereof, as well as other objective and subjective criteria as determined by the Compensation Committee of the Board of Directors.
Investment Commitments
As of February 3, 2018,January 29, 2022, the Company had an unfunded commitment to invest €4.5€1.0 million ($5.71.1 million) in a private equity fund. Refer to Note 2021 for further information.
Legal and Other Proceedings
On May 6, 2009, Gucci America, Inc. filed a complaintThe Company is involved in legal proceedings, arising both in the U.S. District Court forordinary course of business and otherwise, including the Southern District of New York against Guess?, Inc. and certain third party licensees for the Company asserting, amongproceedings described below as well as various other things, trademark and trade dress law violations and unfair competition. The complaint sought injunctive relief, compensatory damages, including treble damages, and certain other relief. Complaints similar to those in the above action have also been filed by Gucci entities against the Company and certain of its subsidiaries in the Court of Milan, Italy, the Intermediate People’s Court of Nanjing, China and the Court of Paris, France. The three-week bench trial in the U.S. matter concluded on April 19, 2012, with the court issuing a preliminary ruling on May 21, 2012 and a final ruling on July 19, 2012. Although the plaintiff was seeking compensation in the U.S. matter in the form of damages of $26 million and an accounting of profits of $99 million, the final ruling provided for monetary damages of $2.3 million against the Company and $2.3 million against certain of its licensees. The court also granted narrow injunctions in favor of the plaintiff for certain of the claimed infringements. On August 20, 2012, the appeal period expired without any party having filed an appeal, rendering the judgment final. On May 2, 2013, the Court of Milan ruled in favor of the Company in the Milan, Italy matter. In the ruling, the Court rejected all of the plaintiff’s claims and ordered the cancellation of three of the plaintiff’s Italian and four of the plaintiff’s European Community trademark registrations. On June 10, 2013, the plaintiff appealed the Court’s ruling in the Milan matter. On September 15, 2014,
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the Court of Appeal of Milan affirmed the majority of the lower Court’s ruling in favor of the Company, but overturned the lower Court’s finding with respect to an unfair competition claim. That portion of the matter is now in a damages phase based on the ruling. On October 16, 2015, the plaintiff appealed the remainder of the Court of Appeal of Milan’s ruling in favor of the Companyother matters incidental to the Italian Supreme CourtCompany’s business. Unless otherwise stated, the resolution of Cassation. In the China matter, the Intermediate People’s Court of Nanjing, China issued a ruling on November 8, 2013 granting an injunction in favor of the plaintiff for certain of the claimed infringements on handbags and small leather goods and awarding the plaintiff statutory damages in the amount of approximately $80,000. The Company strongly disagreed with the Court’s decision and appealed the ruling. On August 31, 2016, the Court of Appeal for the China matter issued a decision in favor of the Company, rejecting all of the plaintiff’s claims. In March 2017, the plaintiff petitioned the China Supreme Court for a retrial of the matter. On January 30, 2015, the Court of Paris ruled in favor of the Company in the France matter, rejecting all of the plaintiff’s claims and partially canceling two of the plaintiff’s community trademark registrations and one of the plaintiff’s international trademark registrations. On February 17, 2015, the plaintiff appealed the Court of Paris’ ruling. Although the Company believes that it has a strong position with respectany particular proceeding is not currently expected to each of the remaining matters, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcomes will have a material adverse impact on the Company’s financial position, or results of operations. The parties are currently engagedoperations or cash flows. Even if such an impact could be material, the Company may not be able to estimate the reasonably possible loss or range of loss until developments in settlement discussions with respectthe proceedings have provided sufficient information to the remaining matters.support an assessment.
The Company has received customs tax assessment notices from the Italian Customs Agency (“ICA”) regarding its customs tax audit of one1 of the Company’s European subsidiaries for the period from July 2010 through December 2012. Such assessments totaled €9.8 million ($12.210.9 million), including potential penalties and interest. The Company strongly disagreesdisagreed with the ICA’s positions that the Italian Customs Agency has taken and therefore filed appeals with the Milan First Degree Tax Court (“MFDTC”). In May 2015, the MFDTC issuedThose appeals were split into a judgment in favornumber of different cases that were then heard by different sections of the Company in relation to the first set of appeals (covering the period through September 2010) and canceled the related assessments totaling €1.7 million ($2.1 million). In November 2015, the Italian Customs Agency notified the Company of its intent to appeal this firstMFDTC. The MFDTC judgment. During fiscal 2017, the Appeals Court ruled in favor of the Company and rejectedon all of these appeals. The ICA subsequently appealed €9.7 million ($10.8 million) of these favorable MFDTC judgments with the appeal by the Italian Customs Agency on the first MFDTC judgment. During fiscal 2017, the MFDTC also issued judgmentsAppeals Court. To date, €8.5 million ($9.5 million) have been decided in favor of the Company in relation to the second through seventh set of appeals (covering the period from October 2010 through December 2012) and canceled the related assessments totaling €8.1€1.2 million ($10.11.3 million). Subsequently, have been decided in favor of the Italian Customs AgencyICA. The Company believes that the unfavorable Appeals Court ruling is incorrect and inconsistent with the prior rulings on similar matters by both the MFDTC and other judges within the Appeals Court, and has appealed the majority of these favorable MFDTC judgments, as well as certaindecision to the Supreme Court. The ICA has appealed most of the favorable Appeals Court judgments. While these MFDTC judgmentsrulings to the Supreme Court. To date, of the cases that have been favorableappealed to the Supreme Court, €0.4 million ($0.4 million) have been decided in favor of the Company therebased on the merits of the case and €1.1 million ($1.2 million) have been remanded back to the lower court for further consideration. There can be no assurances that the Italian Customs AgencyCompany will not be successful in itsthe remaining appeals. It also continues to be possible that the Company will receive similar or even larger assessments for periods subsequent to December 2012 or other claims or charges related to the matter in the future. Although the Company believes that it has a strong position and will continue to vigorously defend this matter, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcome will have a material impact on the Company’s financial position, or results of operations.operations or cash flows.
On June 6, 2017, the European Commission notifiedJanuary 19, 2021, a former model for the Company that it has initiated proceedings to investigate whether certain offiled an action against the Company’s practicesCompany's Chief Creative Officer and agreements concerning the distribution of apparel and accessories withinCompany in the European Union breach European Union competition rules related to cross-border transactions, internet sales limitations and resale price restrictions.California Superior Court in Los Angeles (Jane Doe v. Paul Marciano, et al.). The initiation of the proceedings does not meancomplaint asserts several claims based on allegations that the European Commissionformer model was treated improperly by Mr. Paul Marciano and retaliated against by the Company. The complaint seeks an unspecified amount of general damages, medical expenses, lost earnings, punitive damages and attorneys’ fees. The case has made a definitive conclusion regarding whetherbeen moved to arbitration and is still at an early stage. Mr. Paul Marciano and the Company breached any rules. Thedispute these claims fully and intend to contest them vigorously. In March and April 2021, the Company has cooperatedreceived separate communications from two other individuals containing similar allegations against Mr. Paul Marciano and plans to continue to cooperatethe Company. Each individual who contacted the Company in March 2021 and April 2021 is represented by the same attorney who represents the plaintiff in the January 2021 action. Though no complaint was filed with the European Commission, including through responses to requests for information and through changes to certain business practices and agreements, as appropriate. If a violation is ultimately found, a broad range of remedies is potentially availablerespect to the European Commission, including imposing a fine and/allegations in the March 2021 letter and Mr. Paul Marciano and the Company disputed each of those allegations fully, in order to avoid the cost of litigation and without admitting liability or injunctive relief prohibiting or restricting certain business practices. As of November 6, 2017,fault, the Company and the European Commission agreed to beginMr. Paul Marciano entered into a settlement discussion process to determine if the parties can mutually agree on an outcome of the proceedings. Those discussions are still ongoing. At this point, the Company is unable to predict the timing or outcome of these proceedings, including the magnitude of any potential fine. However, the Company does not currently believe that any changes to its business practices or agreements made in connection with this proceeding will have a material impact on its ongoing business operations within the European Union.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
agreement with the individual who sent the March 2021 letter, resolving the claims for an aggregate total amount of $300,000 in July 2021.
On October 22, 2021, the individual who sent the April 2021 letter filed an action against Mr. Paul Marciano and the Company in the United States District Court for the Central District of California (Jane Doe 3 v. Paul Marciano, et al.). The complaint asserts a claim under the Trafficking Victims Protection Act based on allegations that the individual was treated improperly by Mr. Paul Marciano. The complaint seeks an unspecified amount of compensatory damages, punitive damages and attorneys’ fees. Though Mr. Paul Marciano and the Company is also involveddisputed these claims fully, in various otherorder to avoid the cost of litigation and without admitting liability or fault, the Company and Mr. Paul Marciano entered into a settlement agreement with the individual who sent the April 2021 letter and filed the October 2021 action, resolving the claims for an aggregate total amount of $120,000 in March 2022.
On March 16, 2022, the plaintiff in the January 2021 action and other matters incidental toanother former model for the Company’s business, the resolutions of which are not expected to have a material adverse effectCompany filed an action against those individuals who were on the Company’s financial position or resultsCompany's Board of operations.Directors in January, 2019 (the “Defendants”) in the California Superior Court in Los Angeles (Jane Doe 1 and Jane Doe 2 v. Maurice Marciano, et al.). The complaint asserts that the Defendants aided and abetted the alleged improper behavior of Mr. Paul Marciano described in the January 2021 action and discomfort felt by the other individual during interactions with Mr. Paul Marciano described in the March 2022 action. The complaint seeks an unspecified amount of general damages and attorneys’ fees and seeks an order for the Defendants to remove Mr. Paul Marciano from the Board of Directors and relieve him of his day-to-day duties at the Company. The individual plaintiffs in the March 2022 action are represented by the same attorney who represents the plaintiffs in the January 2021 and October 2021 actions.
Redeemable Noncontrolling Interests
The Company is party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest for its majority-owned subsidiary, Guess Brasil Comércio e Distribuição S.A. (“Guess Brazil”), which was established through a majority-owned joint venture during fiscal 2014.. The put arrangement for Guess Brazil, representing 40% of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company beginning in the sixth year of the agreement, or sooner in certain limited circumstances, and every third anniversary from the end of the sixth year thereafterbeginning in March 2019, subject to certain time restrictions. The redemption value of the Guess Brazil put arrangement is based on a multiple of Guess Brazil’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s consolidated balance sheet. During fiscal 2017, the Company and the noncontrolling interest holder increased their capital contributions by $1.7 million, of which $1.0 million was paid by the Company and the remaining amount was paid by the noncontrolling interest holder to retain the same pro-rata interest in Guess Brazil. The carrying value of the redeemable noncontrolling interest related to Guess Brazil was $1.6$0.4 million and $1.7$0.9 million as of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, respectively.
The Company is also party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest for its majority-owned subsidiary, Guess? CIS, LLC (“Guess CIS”), which was established through a majority-owned joint venture during fiscal 2016. The put arrangement for Guess CIS, representing 30%of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company during the period beginning after the fifth anniversary of the agreement through December 31, 2025, or sooner in certain limited circumstances. The redemption value of the Guess CIS put arrangement is based on a multiple of Guess CIS’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s consolidated balance sheet. During fiscal 2016, the Company made an initial contribution of $2.0 million. During fiscal 2017, the Company and the noncontrolling interest holder increased their capital contributions by $5.0 million, of which $3.5 million was paid by the Company and the remaining amount was paid by the noncontrolling interest holder to retain the same pro-rata interest in Guess CIS. During fiscal 2018, the Company and the noncontrolling interest holder made an additional capital contribution totaling $3.2 million, of which $2.2 million was paid by the Company and the remaining amount was paid by the noncontrolling interest holder to retain the same pro-rata interest in Guess CIS. The carrying value of the redeemable noncontrolling interest related to Guess CIS was $4.0$9.1 million and $2.8$3.0 million as of February 3, 2018each of the fiscal years ended January 29, 2022 and January 28, 2017, respectively.
30, 2021. The Company was previously party to ais in the process of purchasing the 30% interest from its joint venture partner.
The redeemable noncontrolling interests of Guess Brazil and Guess CIS put arrangement in connection with its now wholly-owned subsidiary, Guess Sud SAS (“Guess Sud”). Underarrangements are recorded at the termsgreater of this put arrangement, which represented 40%their carrying values, adjusted for their share of the total outstanding interestallocation of that subsidiary,income or loss, dividends and foreign currency translation adjustments, or redemption values. During fiscal 2022, the Company recorded a redeemable noncontrolling interest holder had the option to exercise the put arrangement at its discretion by providing written notice to the Company any time after January 30, 2012. The redemption value adjustment of the put arrangement was determined based on a method which approximated fair value. During$5.7 million. The Company had no redeemable noncontrolling interest redemption value adjustments during fiscal 2017, the Company acquired the remaining 40% interest in Guess Sud for $4.4 million.
2021 and fiscal 2020.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the total carrying amount of redeemable noncontrolling interests for fiscal 2018 and fiscal 2017 is as follows (in thousands):
| | | | | | | | | | | |
| Year Ended | | Year Ended |
| Jan 29, 2022 | | Jan 30, 2021 |
Beginning balance | $ | 3,920 | | | $ | 4,731 | |
Redeemable noncontrolling interest redemption value adjustment | 5,654 | | | — | |
Foreign currency translation adjustment | (74) | | | (811) | |
Ending balance | $ | 9,500 | | | $ | 3,920 | |
|
| | | | | | | |
| Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 |
Beginning balance | $ | 4,452 |
| | $ | 5,252 |
|
Foreign currency translation adjustment | 187 |
| | 818 |
|
Purchase of redeemable noncontrolling interest | — |
| | (4,445 | ) |
Noncontrolling interest capital contribution | 951 |
| | 2,157 |
|
Redeemable noncontrolling interest redemption value adjustment | — |
| | 670 |
|
Ending balance | $ | 5,590 |
| | $ | 4,452 |
|
(15)(16) Savings Plans
The Company established the Guess?, Inc. Savings Plan (the “Savings Plan”) under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, employees (“associates”) may contribute up to 100% of their compensation per year subject to the elective limits as defined by IRS guidelines and the Company may make matching contributions in amounts not to exceed 3.0% of the associates’ annual compensation. Investment selections consist of mutual funds and do not include any Company common stock. The Company’s contributions to the Savings Plan amounted to $1.1$1.7 million,, $1.2 $1.4 million and $1.3$1.4 million for fiscal 2018,2022, fiscal 20172021 and fiscal 2016,2020, respectively.
Effective January 1, 2006, the Company adopted a Non-qualifiedNon-Qualified Deferred Compensation Plan (the “DCP”). Under the DCP, select employees who satisfy certain eligibility requirements and members of the Board of Directors may make annual irrevocable elections to defer a portion of their base compensation and/or bonuses. The deferred amounts and earnings thereon are payable to participants at specified future distribution dates, upon termination of employment, retirement, disability, death or change in control of the Company, in a lump sum or installments, pursuant to elections under the rules of the DCP. The participants to the DCP have an unsecured contractual commitment by the Company to pay the amounts due under the DCP. The deferred compensation liability as of February 3, 2018January 29, 2022 and January 28, 201730, 2021 was $13.5$15.8 million and $11.2$15.6 million, respectively, and was included in accrued expenses and other long-term liabilities in the Company’s consolidated balance sheets depending on the expected timing of payments. The Company has purchased corporate-owned life insurance, which is held in a rabbi trust, to offset this liability. The assets held in the rabbi trust are not available for general corporate purposes except in the event of bankruptcy of the Company. As of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, the long-term asset was $13.7$16.6 million and $12.0$15.3 million, respectively. All earnings and expenses of the rabbi trust are reported in the Company’s consolidated statements of income (loss) in other income and expense.(expense). For fiscal 2018,2022, fiscal 20172021 and fiscal 2016,2020, the Company incurred unrealized gains (losses) of $1.7$0.8 million, $1.5$1.8 million and $(0.7)$1.5 million,, respectively, related to the change in the value of the insurance policy investments. During fiscal 2016,
(17) Quarterly Information (Unaudited)
The following is a summary of the Company also recorded realized gains of $0.3 million in other income resulting from payout on the insurance policies. During fiscal 2016, the Company made contributions of $1.5 million to the DCP.unaudited quarterly financial information (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarterly Periods Ended1 |
Year Ended January 29, 2022 | | | May 1, 2021 | | Jul 31, 2021 | | Oct 30, 2021 | | Jan 29, 2022 |
Net revenue | | | $ | 520,002 | | | $ | 628,624 | | | $ | 643,070 | | | $ | 799,935 | |
Gross profit | | | 211,558 | | | 294,086 | | | 293,604 | | | 370,257 | |
Net earnings | | | 12,870 | | | 63,147 | | | 32,367 | | | 71,665 | |
Net earnings attributable to Guess?, Inc. | | | 12,006 | | | 61,062 | | | 29,880 | | | 68,415 | |
Net earnings per common share attributable to common stockholders2,3,4,5,6: | | | | | | | | | |
Basic | | | $ | 0.19 | | | $ | 0.94 | | | $ | 0.46 | | | $ | 1.07 | |
Diluted | | | $ | 0.18 | | | $ | 0.91 | | | $ | 0.45 | | | $ | 1.04 | |
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
Year Ended January 30, 2021 | | | May 2, 2020 | | Aug 1, 2020 | | Oct 31, 2020 | | Jan 30, 2021 |
Net revenue | | | $ | 260,251 | | | $ | 398,539 | | | $ | 569,284 | | | $ | 648,455 | |
Gross profit | | | 34,229 | | | 147,028 | | | 239,520 | | | 276,325 | |
Net earnings (loss) | | | (160,538) | | | (20,692) | | | 27,554 | | | 72,935 | |
Net earnings (loss) attributable to Guess?, Inc. | | | (157,666) | | | (20,358) | | | 26,376 | | | 70,419 | |
Net earnings (loss) per common share attributable to common stockholders2,3,4,5,6,7,8: | | | | | | | | | |
Basic | | | $ | (2.40) | | | $ | (0.31) | | | $ | 0.41 | | | $ | 1.10 | |
Diluted | | | $ | (2.40) | | | $ | (0.31) | | | $ | 0.41 | | | $ | 1.07 | |
1All fiscal quarters presented consisted of 13 weeks.
(16) Quarterly Information (Unaudited)
The following is a summary2Per common share amounts for the quarters and full years have been calculated separately. Accordingly, quarterly amounts may not add to the annual amount because of differences in the average common shares outstanding during each period. In addition, holders of the unaudited quarterly financial information for fiscal 2018Company’s restricted stock awards are not required to participate in losses of the Company. Therefore, in periods in which the Company reported a net loss, such losses were not allocated to these participating securities, and, fiscal 2017 (in thousands, exceptas a result, basic and diluted net loss per share data):were the same in those periods.
3Per common share amounts reflect the net impact of share repurchases, cash interest expense and amortization of debt discount and debt issuance costs related to the $300 million convertible senior notes. Refer to Note 23 and Note 10 for further information regarding share repurchases and the Company’s convertible senior notes.
4The Company recorded certain professional service and legal fees and related (credits) costs of $1.1 million, $0.1 million, $0.6 million, and $0.9 million during the first, second, third and fourth quarters of 2022, respectively. The Company recorded $0.3 million, $(0.2) million, $(0.2) million, and $(0.5) million of certain professional service and legal fees and related (credits) costs during the first, second, third and fourth quarters of fiscal 2021, respectively.
5The Company recorded asset impairment charges of $0.4 million, $1.5 million, $1.2 million, and $0.1 million during the first, second, third and fourth quarters of fiscal 2022, respectively. The Company also recorded asset impairment charges of $53.0 million, $12.0 million, $10.3 million, and $5.2 million during the first, second, third and fourth quarters of fiscal 2021, respectively. The asset impairment charges related primarily to impairment of operating lease right-of-use assets and property and equipment related to certain retail locations resulting from lower revenue and future cash flow projections from the ongoing effects of the COVID-19 pandemic. Refer to Notes 5 and 9 for further information.
6The Company recorded net gains (losses) on lease modifications of $2.1 million, $0.4 million, $(3.0) million and $0.7 million during the first, second, third and fourth quarters of fiscal 2022, respectively. The Company also recorded net gains (losses) on lease modifications of $(0.5) million, $0.9 million and $2.4 million during the first, second and fourth quarters of fiscal 2021. Refer to Note 1 for further information regarding net gains (losses) on lease modifications.
7During fiscal 2021, the Company recorded discrete tax adjustments related primarily to the negative impact from cumulative valuation allowances, partially offset by tax benefits from a tax rate change due to net operating loss carryback. The Company recognized an increase (decrease) in valuation allowances of $3.7 million, $1.2 million and $(0.7) million resulting from jurisdictions where there have been cumulative net operating losses, limiting the Company’s ability to consider other subjective evidence to continue to recognize the existing deferred tax assets during the first, third and fourth quarters of fiscal 2021, respectively. This was partially offset by tax benefits (expenses) of approximately $11.8 million, $(7.9) million, $0.7 million and $(3.8) million recorded during the first, second, third and fourth quarters of fiscal 2021 respectively, resulting from a tax rate change related to the ability to carryback net operating losses to tax years with a higher federal corporate tax rate as allowed under the CARES Act enacted in March 2020.
8During the first quarter of fiscal 2021, the Company recorded $0.2 million in separation-related charges mainly related to certain cash severance payments, partially offset by adjustments to non-cash stock-based compensation expense related to our former Chief Executive Officer resulting from changes in expected performance conditions of certain previously granted stock awards that were no longer subject to service vesting requirements after his departure. The Company also recorded $2.5 million and $0.7 million in separation-related charges mainly related to headcount reduction in response to the COVID-19 pandemic during the second and third quarters of fiscal 2021, respectively.
|
| | | | | | | | | | | | | | | | |
| | Quarterly Periods Ended (1) |
Year Ended February 3, 2018 | | Apr 29, 2017 | | Jul 29, 2017 | | Oct 28, 2017 | | Feb 3, 2018 |
Net revenue (2) | | $ | 454,345 |
| | $ | 568,292 |
| | $ | 548,953 |
| | $ | 792,164 |
|
Gross profit | | 144,642 |
| | 198,027 |
| | 191,109 |
| | 295,070 |
|
Net earnings (loss) | | (21,227 | ) | | 15,881 |
| | (1,662 | ) | | 3,107 |
|
Net earnings (loss) attributable to Guess?, Inc. | | (21,293 | ) | | 15,219 |
| | (2,860 | ) | | 1,040 |
|
Net earnings (loss) per common share attributable to common stockholders: (3) (4) (5) (6) | | | | | | | | |
Basic | | $ | (0.26 | ) | | $ | 0.18 |
| | $ | (0.04 | ) | | $ | 0.01 |
|
Diluted | | $ | (0.26 | ) | | $ | 0.18 |
| | $ | (0.04 | ) | | $ | 0.01 |
|
|
| | | | | | | | | | | | | | | | |
| | Quarterly Periods Ended (1) |
Year Ended January 28, 2017 | | Apr 30, 2016 | | Jul 30, 2016 | | Oct 29, 2016 | | Jan 28, 2017 |
Net revenue (2) | | $ | 444,061 |
| | $ | 540,412 |
| | $ | 531,976 |
| | $ | 674,004 |
|
Gross profit | | 142,759 |
| | 185,632 |
| | 180,242 |
| | 236,407 |
|
Net earnings | | (25,154 | ) | | 32,167 |
| | 9,729 |
| | 8,656 |
|
Net earnings attributable to Guess?, Inc. | | (25,178 | ) | | 32,269 |
| | 9,103 |
| | 6,567 |
|
Net earnings per common share attributable to common stockholders: (3) (4) (5) (7) (8) (9) | | | | | | | | |
Basic | | $ | (0.30 | ) | | $ | 0.38 |
| | $ | 0.11 |
| | $ | 0.08 |
|
Diluted | | $ | (0.30 | ) | | $ | 0.38 |
| | $ | 0.11 |
| | $ | 0.08 |
|
| |
(1) | All fiscal quarters presented consisted of 13 weeks with the exception of the quarter ended February 3, 2018 which consisted of 14 weeks. |
| |
(2) | During the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales. Accordingly, prior period amounts related to net royalties, net revenue and cost of product sales have been adjusted to conform to the current period presentation. This resulted in a decrease to net revenue and cost of product sales of $4.2 million, $5.4 million and $5.2 million during the first, second and third quarters of fiscal 2018, respectively. This also resulted in a decrease to net revenue and cost of product sales of $4.8 million, $4.5 million, $4.3 million and $5.3 million during the first, second, third and fourth quarters of fiscal 2017, respectively. This reclassification had no impact on previously reported gross profit, net earnings (loss) or net earnings (loss) per share. Refer to Note 1 for further information regarding this reclassification. |
| |
(3) | Per common share amounts for the quarters and full years have been calculated separately. Accordingly, quarterly amounts may not add to the annual amount because of differences in the average common shares outstanding during each period. |
| |
(4) | The Company recorded net gains (losses) on lease terminations of $(11.5) million and $0.1 million during the third and fourth quarters of fiscal 2018, respectively. There were no net gains (losses) on lease terminations recognized during the first or second quarters of fiscal 2018. During the first and second quarters of fiscal 2017, the Company recorded net gains on lease terminations of $0.1 million and $0.6 million, respectively. There were no net gains (losses) on lease terminations recognized during the third or fourth quarters of fiscal 2017. Refer to Note 1 for further information regarding net gains (losses) on lease terminations. |
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
(5) | During each of the periods presented, the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures. The Company recorded asset impairment charges of $2.8 million, $1.2 million, $2.0 million and $2.5 million, respectively, during the first, second, third and fourth quarters of fiscal 2018. The Company also recorded asset impairment charges of $0.2 million, $0.5 million, $0.8 million and $32.9 million, respectively, during the first, second, third and fourth quarters of fiscal 2017. Refer to Note 5 for further detail regarding asset impairment charges.
|
| |
(6) | During fiscal 2018, the Company recognized additional tax expense of $47.9 million related to the enactment of the Tax Reform. This is comprised of a $24.9 million charge for the provisional re-measurement of certain deferred taxes and related amounts and a provisional charge of $23.0 million to income tax expense for the estimated effects of the transitional tax on the deemed repatriation of foreign earnings. These charges were recorded during the fourth quarter of fiscal 2018. Refer to Note 11 for further detail.
|
| |
(7) | During fiscal 2017, the Company recorded restructuring charges of $6.1 million and a related estimated exit tax charge of approximately $1.9 million. The restructuring charges and related estimated exit tax charge were recorded during the three months ended April 30, 2016. Refer to Note 9 for further detail regarding these charges. |
| |
(8) | During fiscal 2017, the Company sold its minority interest equity holding in a privately-held boutique apparel company for net proceeds of approximately $34.8 million, which resulted in a gain of approximately $22.3 million which was recorded in other income. The gain was recorded during the three months ended July 30, 2016. |
| |
(9) | During fiscal 2017, the Company recorded valuation reserves of $6.8 million resulting from jurisdictions where there have been cumulative net operating losses, limiting the Company’s ability to consider other subjective evidence to continue to recognize the existing deferred tax assets. The Company recorded the valuation reserve during the three months ended January 28, 2017. Refer to Note 11 for further detail.
|
(17)(18) Segment Information
The Company’s reportable business segments and respective accounting policies of the segments are the same as those described in Note 1. Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, asset impairment charges, net gains (losses) from lease terminations, asset impairmentmodifications, restructuring charges and restructuring charges,certain non-recurring credits (charges), if any. Corporate overhead, asset impairment charges, net gains (losses) from lease terminations, asset impairment charges, restructuring charges,modifications, interest income, interest expense and other income and expense(expense) are evaluated on a consolidated basis and not allocated to the Company’s business segments.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
allocated to the Company’s business segments. The Company does not evaluate performance or allocate resources based on segment asset data, and therefore total segment assets are not presented.
Segment information is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
| Jan 29, 20221 | | Jan 30, 20211 | | Feb 1, 20201 |
Net revenue: | | | | | |
Americas Retail | $ | 759,117 | | | $ | 510,806 | | | $ | 811,547 | |
Americas Wholesale | 201,202 | | | 117,607 | | | 186,389 | |
Europe | 1,297,550 | | | 941,546 | | | 1,248,114 | |
Asia2 | 237,053 | | | 232,574 | | | 346,212 | |
Licensing | 96,709 | | | 73,996 | | | 85,847 | |
Total net revenue | $ | 2,591,631 | | | $ | 1,876,529 | | | $ | 2,678,109 | |
Earnings (loss) from operations: | | | | | |
Americas Retail | $ | 124,902 | | | $ | (15,776) | | | $ | 22,279 | |
Americas Wholesale | 53,731 | | | 19,912 | | | 35,674 | |
Europe | 174,860 | | | 66,790 | | | 134,078 | |
Asia2 | (4,114) | | | (20,758) | | | (8,894) | |
Licensing | 88,136 | | | 67,938 | | | 74,459 | |
Total segment earnings from operations | 437,515 | | | 118,106 | | | 257,596 | |
Corporate overhead | (129,588) | | | (100,962) | | | (106,948) | |
| | | | | |
Asset impairment charges3 | (3,149) | | | (80,442) | | | (9,977) | |
Net gains on lease modifications4 | 259 | | | 2,801 | | | — | |
| | | | | |
Total earnings (loss) from operations | $ | 305,037 | | | $ | (60,497) | | | $ | 140,671 | |
Capital expenditures: | | | | | |
Americas Retail | $ | 7,152 | | | $ | 3,052 | | | $ | 19,411 | |
Americas Wholesale | 1,024 | | | 53 | | | 980 | |
Europe | 47,034 | | | 12,631 | | | 33,036 | |
Asia | 4,337 | | | 1,915 | | | 6,782 | |
Corporate overhead | 3,974 | | | 1,225 | | | 1,659 | |
Total capital expenditures | $ | 63,521 | | | $ | 18,876 | | | $ | 61,868 | |
1The Company operates on a 52-week fiscal year calendar, which ends on the Saturday nearest to January 31 of each year. |
| | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 (1) | | Jan 28, 2017 (1) | | Jan 30, 2016 (1) |
Net revenue: | | | | | |
Americas Retail | $ | 833,077 |
| | $ | 935,479 |
| | $ | 981,942 |
|
Americas Wholesale (2) | 150,366 |
| | 146,260 |
| | 155,594 |
|
Europe (2) | 998,657 |
| | 788,194 |
| | 722,877 |
|
Asia (2) | 308,899 |
| | 248,601 |
| | 240,041 |
|
Licensing (3) | 72,755 |
| | 71,919 |
| | 84,041 |
|
Total net revenue (3) | $ | 2,363,754 |
| | $ | 2,190,453 |
| | $ | 2,184,495 |
|
Earnings (loss) from operations: | | | | | |
Americas Retail (2) | $ | (17,301 | ) | | $ | (22,816 | ) | | $ | 18,414 |
|
Americas Wholesale (2) | 25,161 |
| | 24,190 |
| | 29,579 |
|
Europe (2) | 87,376 |
| | 56,961 |
| | 53,673 |
|
Asia (2) | 14,116 |
| | (2,381 | ) | | 10,309 |
|
Licensing (2) | 78,102 |
| | 80,386 |
| | 92,189 |
|
Total segment earnings from operations | 187,454 |
| | 136,340 |
| | 204,164 |
|
Corporate overhead (2) | (102,429 | ) | | (73,859 | ) | | (82,864 | ) |
Net gains (losses) on lease terminations (2) (4) | (11,373 | ) | | 695 |
| | 2,337 |
|
Asset impairment charges (2) (5) | (8,479 | ) | | (34,385 | ) | | (2,287 | ) |
Restructuring charges (6) | — |
| | (6,083 | ) | | — |
|
Total earnings from operations | $ | 65,173 |
| | $ | 22,708 |
| | $ | 121,350 |
|
Capital expenditures: | | | | | |
Americas Retail | $ | 16,899 |
| | $ | 25,881 |
| | $ | 26,384 |
|
Americas Wholesale | 1,303 |
| | 3,320 |
| | 2,854 |
|
Europe | 46,419 |
| | 42,080 |
| | 13,869 |
|
Asia | 12,111 |
| | 13,869 |
| | 6,265 |
|
Licensing | — |
| | 20 |
| | 27 |
|
Corporate overhead | 7,923 |
| | 5,411 |
| | 34,445 |
|
Total capital expenditures | $ | 84,655 |
| | $ | 90,581 |
| | $ | 83,844 |
|
2Within Asia, the Company recorded a loss from operations in China during fiscal 2021, which included approximately $12 million for inventory obsolescence, as well as additional reserves for returns and markdowns, primarily due to the COVID-19 pandemic.3During fiscal 2022 and fiscal 2021, the Company recognized asset impairment charges related primarily to the impairment of certain operating lease ROU assets and impairment of property and equipment related to certain retail stores resulting from lower revenue and future cash flow projections from the ongoing effects of the COVID-19 pandemic and expected store closures. During fiscal 2020, the Company recognized asset impairment charges related primarily to impairment of property and equipment related to certain retail locations resulting from under-performance and expected store closures. Refer to Notes 5 and Note 9 for further information.
4During fiscal 2022 and fiscal 2021, the Company recorded net gains on lease modifications related primarily to the early termination of certain lease agreements. Refer to Note 1 for more information regarding the net gains on lease modifications.
|
| | | | | | | |
| Feb 3, 2018 | | Jan 28, 2017 |
Total assets: | | | |
Americas Retail | $ | 192,917 |
| | $ | 240,857 |
|
Americas Wholesale | 181,548 |
| | 175,136 |
|
Europe | 850,886 |
| | 723,251 |
|
Asia | 242,232 |
| | 182,405 |
|
Licensing | 6,255 |
| | 19,442 |
|
Corporate overhead | 181,796 |
| | 193,395 |
|
Total assets | $ | 1,655,634 |
| | $ | 1,534,485 |
|
| |
(1) | The Company operates on a 52/53-week fiscal year calendar, which ends on the Saturday nearest to January 31 of each year. The results for fiscal 2018 included the impact of an additional week which occurred during the fourth quarter ended February 3, 2018.
|
| |
(2) | During fiscal 2018, net revenue and related costs and expenses for certain globally serviced customers were reclassified into the segment primarily responsible for the relationship. Segment results were also adjusted to exclude corporate performance-based compensation costs, net gains (losses) on lease terminations and asset impairment charges due to the fact that these items are no longer included in the segment results provided to the Company’s chief operating decision maker in order to allocate resources and assess performance. Accordingly, segment results have been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation.
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
(3) | During the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales. Accordingly, net revenue has been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation. This reclassification had no impact on previously reported earnings from operations. |
| |
(4) | During fiscal 2018, the Company incurred net losses on lease terminations related primarily to the modification of certain lease agreements held with a common landlord in North America. During fiscal 2017 and fiscal 2016, the Company recorded net gains on lease terminations related primarily to the early termination of certain lease agreements in Europe. Refer to Note 1 for more information regarding the net gains (losses) on lease terminations. |
| |
(5) | During each of the years presented, the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures. Refer to Note 5 for more information regarding these asset impairment charges. |
| |
(6) | Restructuring charges incurred during fiscal 2017 related to plans to better align the Company’s global cost and organizational structure with its current strategic initiatives. Refer to Note 9 for more information regarding these restructuring charges. |
The table below presents information regarding geographic areas in which the Company operated. Net revenue is classified primarily based on the country where the Company’s customer is located as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
| Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Net product sales: | | | | | |
U.S. | $ | 722,610 | | | $ | 461,555 | | | $ | 725,938 | |
Italy | 265,106 | | | 182,115 | | | 298,124 | |
Germany | 189,083 | | | 138,762 | | | 126,740 | |
Canada | 150,339 | | | 104,432 | | | 180,947 | |
Spain | 137,037 | | | 97,032 | | | 152,782 | |
South Korea | 126,563 | | | 120,703 | | | 144,955 | |
| | | | | |
Other foreign countries | 904,184 | | | 697,934 | | | 962,776 | |
Total product sales | 2,494,922 | | | 1,802,533 | | | 2,592,262 | |
Net royalties | 96,709 | | | 73,996 | | | 85,847 | |
Net revenue | $ | 2,591,631 | | | $ | 1,876,529 | | | $ | 2,678,109 | |
The Company’s long-lived assets by geographic location are as follows (in thousands):
| | | | | | | | | | | |
| Jan 29, 2022 | | Jan 30, 2021 |
Long-lived assets: | | | |
U.S. | $ | 256,685 | | | $ | 312,346 | |
Italy | 115,356 | | | 114,021 | |
Germany | 38,757 | | | 29,112 | |
Canada | 23,994 | | | 30,024 | |
Spain | 121,392 | | | 125,655 | |
South Korea | 8,440 | | | 10,491 | |
| | | |
Other foreign countries | 412,478 | | | 409,167 | |
Total long-lived assets | $ | 977,102 | | | $ | 1,030,816 | |
|
| | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 (1) | | Jan 30, 2016 (1) |
Net revenue: | | | | | |
U.S. | $ | 742,620 |
| | $ | 836,954 |
| | $ | 892,056 |
|
Italy | 289,299 |
| | 257,542 |
| | 245,451 |
|
Canada | 203,965 |
| | 220,720 |
| | 222,470 |
|
South Korea | 156,101 |
| | 157,503 |
| | 162,200 |
|
Other foreign countries | 971,769 |
| | 717,734 |
| | 662,318 |
|
Total net revenue | $ | 2,363,754 |
| | $ | 2,190,453 |
| | $ | 2,184,495 |
|
|
| | | | | | | |
| Feb 3, 2018 | | Jan 28, 2017 |
Long-lived assets: | | | |
U.S. | $ | 109,943 |
| | $ | 115,728 |
|
Italy | 34,884 |
| | 31,013 |
|
Canada | 18,845 |
| | 13,690 |
|
South Korea | 9,584 |
| | 8,664 |
|
Other foreign countries | 187,214 |
| | 132,921 |
|
Total long-lived assets | $ | 360,470 |
| | $ | 302,016 |
|
| |
(1) | During the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales. Accordingly, net revenue by geographic area has been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation. |
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(18)(19) Earnings (Loss) Per Share
The computation of basic and diluted net earnings (loss) per common share attributable to common stockholders is as follows (in thousands, except per share data):
| | | Year Ended | | Year Ended | | Year Ended | | Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 | | Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Net earnings (loss) attributable to Guess?, Inc. | $ | (7,894 | ) | | $ | 22,761 |
| | $ | 81,851 |
| Net earnings (loss) attributable to Guess?, Inc. | $ | 171,363 | | | $ | (81,229) | | | $ | 95,975 | |
Less net earnings attributable to nonvested restricted stockholders | 764 |
| | 527 |
| | 532 |
| Less net earnings attributable to nonvested restricted stockholders | 1,831 | | | 181 | | | 850 | |
Net earnings (loss) attributable to common stockholders | $ | (8,658 | ) | | $ | 22,234 |
| | $ | 81,319 |
| Net earnings (loss) attributable to common stockholders | $ | 169,532 | | | $ | (81,410) | | | $ | 95,125 | |
| | | | | | | | | | | |
Weighted average common shares used in basic computations | 82,189 |
| | 83,666 |
| | 84,264 |
| Weighted average common shares used in basic computations | 64,021 | | | 64,179 | | | 70,461 | |
Effect of dilutive securities: | | | | | | Effect of dilutive securities: | | | | | |
Stock options and restricted stock units (1) | — |
| | 163 |
| | 261 |
| |
Stock options, convertible senior notes and restricted stock units1 | | Stock options, convertible senior notes and restricted stock units1 | 1,898 | | | — | | | 1,208 | |
Weighted average common shares used in diluted computations | 82,189 |
| | 83,829 |
| | 84,525 |
| Weighted average common shares used in diluted computations | 65,919 | | | 64,179 | | | 71,669 | |
Net earnings (loss) per common share attributable to common stockholders: | | | | | | Net earnings (loss) per common share attributable to common stockholders: | | | | | |
Basic | $ | (0.11 | ) | | $ | 0.27 |
| | $ | 0.97 |
| Basic | $ | 2.65 | | | $ | (1.27) | | | $ | 1.35 | |
Diluted | $ | (0.11 | ) | | $ | 0.27 |
| | $ | 0.96 |
| Diluted | $ | 2.57 | | | $ | (1.27) | | | $ | 1.33 | |
|
1For fiscal 2021, there were 867,704 potentially dilutive shares that were not included in the computation of diluted weighted average common shares and common equivalent shares outstanding because their effect would have been antidilutive given the Company’s net loss.
| |
(1) | For fiscal 2018, there were 652,494 potentially dilutive shares that were not included in the computation of diluted weighted average common shares and common equivalent shares outstanding because their effect would have been antidilutive given the Company’s net loss. |
For fiscal 2018,2022, fiscal 20172021 and fiscal 2016,2020, equity awards granted for 2,925,549, 3,254,259562,876, 2,870,479 and 2,737,573,2,911,685, respectively, of the Company’s common shares were outstanding but were excluded from the computation of diluted weighted average common shares and common equivalent shares outstanding because the assumed proceeds, as calculated under the treasury stock method, resulted in these awards being antidilutive. For fiscal 2018, the Company also excluded 899,345 nonvested stock units which were subject to the achievement of performance-based vesting conditions from the computation of diluted weighted average common shares and common equivalent shares outstanding because these conditions were not achieved as of February 3, 2018. For fiscal 2017, theThe Company excluded 473,878300,000 and 240,143 nonvested stock units which were subject to the achievement of performance-based or market-based vesting conditions from the computation of diluted weighted average common shares and common equivalent shares outstanding because these conditions were not achieved as of January 28, 2017. For fiscal 2016, the Company did not exclude any29, 2022 and February 1, 2020, respectively. There were 0 nonvested stock units which were subject to the achievement of performance-based or market-based vesting conditions that were excluded from the computation of diluted weighted average common shares and common equivalent shares outstanding since theseas the respective conditions were achieved as of January 30, 2016.2021.
The conversion spread on the Company’s convertible senior notes has a dilutive impact on diluted earnings per share when the average market price of the Company’s common stock for a given period exceeds the initial conversion price of $25.78 per share of common stock, subject to adjustment upon the occurrence of certain events. On November 23, 2021, the Company announced an increase to its regular quarterly cash dividend from $0.1125 to $0.225 per share on the Company’s common stock. In connection with the increase to the quarterly cash dividend, the Company adjusted the conversion price of the convertible senior notes to $25.66 effective as of December 7, 2021, in accordance with the terms of the indenture governing the convertible senior notes. For fiscal 2022, the convertible senior notes have been excluded from the computation of diluted earnings per share as the effect would be antidilutive since the conversion price of the convertible senior notes exceeded the average market price of the Company’s common stock.
Warrants to purchase 11.6 million shares of the Company’s common shares at an initial strike price of $46.88 per share were outstanding as of January 29, 2022 but were excluded from the computation of diluted earnings per share since the warrants’ strike price was greater than the average market price of the Company’s
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
common stock during the period. See Note 10 for more information regarding the Company’s convertible senior notes.
(19)
(20) Share-Based Compensation
Share-Based Compensation Plans
The Company has four4 share-based compensation plans. The Guess?, Inc. 2004 Equity Incentive Plan (the “Plan”) provides that the Board of Directors may grant stock options and other equity awards to officers, key employees and certain consultants and advisors to the Company or any of its subsidiaries. Effective May 19, 2017, the Plan was amended to increase the authorized issuance of shares from 15,000,000 shares of common stock to 29,100,000 shares of common stock. In addition, the amendment provided that awards granted on or after May 1, 2017 (other than stock options or stock appreciation rights) would be counted against the number of shares available to be issued under the Plan as 3.54 shares for every one share actually issued. The amendment also extended the term through May 19, 2027 and extended the Company’s ability to grant certain performance-based awards under the Plan through the first annual meeting of the Company’s shareholders in calendar 2022. As of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, there were 15,350,4283,955,910 and 4,092,2416,033,221 shares available for grant under the Plan, respectively. Stock options granted under the Plan have ten-yearten-year terms and typically vest and become fully exercisable in increments of one-fourth of the shares granted on each anniversary from the date of grant. Stock awards/units granted under the Plan typically vest in increments of one-fourth of the shares granted on each anniversary from the date of grant. The three most recent annual grants for stock options and other equity awards had initial vesting periods of nine months followed by three annual vesting periods.
The Guess?, Inc. Employee Stock Purchase Plan (“ESPP”) allows qualified employees to participate in the purchase of designated shares of the Company’s common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period.
The Guess?, Inc. 2006 Non-Employee Directors’ Stock Grant and Stock Option Plan (the “Director Plan”) provides for the grant of equity awards to non-employee directors. Effective May 20, 2016, the Director Plan was amended to extend the term through June 30, 2026, reduce the authorized issuance of shares from 2,000,000 shares of common stock to 1,850,000 shares of common stock and allow more flexibility to structure compensation arrangements for the Company’s non-employee directors. All other remaining provisions under the Director Plan remained in full force and effect. As of February 3, 2018January 29, 2022 and January 28, 2017,30, 2021, there were 495,489240,941 and 582,639299,807 shares available for grant under this plan, respectively.
In addition, the Guess?, Inc. 1996 Equity Incentive Plan, under which equity grants have not been permitted since the approval of the Plan in 2004, continues to govern outstanding awards previously made thereunder.
Performance-Based Awards
TheCompany hasgranted certain nonvested units that require certain minimum performance targets to be achieved in order for these awards to vest. Vesting is also subject to continued service requirements through the vesting date. If the minimum performance targets are not forecasted to be achieved, no expense is recognized during the period.
The Company has granted certain nonvested stock units subject to performance-based vesting conditions to select executive officers. Each award of nonvested stock units generally has an initial vesting period from the date of the grant through either (i) the end of the first fiscal year or (ii) the first anniversary of the date of grant, followed by annual vesting periods which may range from two-to-threetwo-to-three years. The nonvested stock units are subject to the achievement of certain performance-based vesting conditions.
The Company has also granted a target number of nonvested stock units to select key management, including certain executive officers. The number of shares that may ultimately vest with respect to each award may range from 0% up to 200%100% of the target number of shares, subject to the achievement of certain performance-based vesting conditions. Any shares that are ultimately issued are scheduled to vest at the end of the third fiscal year following the grant date.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Market-Based Awards
The Company has granted certain nonvested stock units which are subject to market-based performance targets in order for these units to vest. Vesting is also subject to continued service requirements through the vesting date.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The grant date fair value for such nonvested stock units was estimated using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the performance period. Compensation expense for such nonvested stock units is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied.
The Company has granted certain nonvested stock units subject to market-based vesting conditions to select executive officers. TheThese market-based awards include (i) units where the number of shares that may ultimately vest will equal 0% to 150% of the target number of shares, subject to the performance of the Company’s total stockholder return (“TSR”) relative to the TSR of a select group of peer companies over a three-year period and (ii) units scheduled to vest based on the attainment of certain absolute stock price levels over a four-year period. Vesting is also subject to continued service requirements through the vesting date.
Contingently Returnable Restricted Stock Awards
On July 7, 2015, the Company granted Victor Herrero, the Company’s Chief Executive Officer, 150,000 restricted stock units in addition to certain other stock options and nonvested stock units inIn connection with ana new employment agreement entered into between the Company and Mr. HerreroAlberini (the “Herrero“Alberini Employment Agreement”). These, who became the Company’s Chief Executive Officer on February 20, 2019, the Company granted 150,000 restricted stock units that vested immediately but were considered contingently returnable as a result of a one-year implied service condition set forth in the HerreroAlberini Employment Agreement. This service condition was metsatisfied during the year ended January 28, 2017. fiscal 2021.
Compensation expense for these types of restricted stock units wasare recognized on a straight-line basis over the implied service period.
Other Special Grants
As a precautionary measure to maintain maximum liquidity in response to the COVID-19 pandemic, the Company elected to pay out its fiscal 2020 corporate bonus in stock awards rather than cash compensation. As such, on April 27, 2020, the Company issued 816,708 restricted stock units that vested immediately. These awards were granted to certain of the Company’s employees that were eligible to receive the corporate bonus based on the satisfaction of certain performance measures during fiscal 2020.
On February 20, 2019, the Company granted 600,000 stock options and 250,000 nonvested stock units which were subject to the achievement of certain performance-based vesting conditions to Mr. Alberini in connection with the Alberini Employment Agreement.
Share-Based Compensation Expense
Compensation expense for nonvested stock options and stock awards/units that are not subject to performance-based vesting conditions is recognized on a straight-line basis over the vesting period. Compensation expense for performance-based awards that vest in increments is recognized based on an accelerated attribution method. During fiscal 2018, theThe Company adopted authoritative guidance which eliminates the requirement to estimate forfeitures, but rather provides for an election that would allow entitieshas elected to account for forfeitures as they occur. The Company adopted this election using the modified retrospective method and recorded a cumulative adjustment to reduce retained earnings by approximately $0.3 million as of the beginning of the period of adoption.
The following table summarizes the share-based compensation expense recognized under all of the Company’s stock plans during fiscal 2018, fiscal 2017 and fiscal 2016(in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
| Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Stock options | $ | 3,528 | | | $ | 3,430 | | | $ | 2,811 | |
Stock awards/units | 17,385 | | | 15,110 | | | 21,250 | |
ESPP | 206 | | | 290 | | | 229 | |
Total share-based compensation expense | $ | 21,119 | | | $ | 18,830 | | | $ | 24,290 | |
|
| | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
| Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 |
Stock options | $ | 2,345 |
| | $ | 2,219 |
| | $ | 2,113 |
|
Stock awards/units | 16,347 |
| | 14,544 |
| | 16,604 |
|
ESPP | 160 |
| | 145 |
| | 163 |
|
Total share-based compensation expense | $ | 18,852 |
| | $ | 16,908 |
| | $ | 18,880 |
|
F-54
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock options
The following table summarizes the stock option activity under all of the Company’s stock plans during fiscal 2018:plans:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value ($000’s) |
Options outstanding at January 30, 2021 | 3,505,230 | | | $ | 17.64 | | | | | |
Granted | — | | | $ | — | | | | | |
Exercised | (191,435) | | | $ | 17.41 | | | | | |
Forfeited | (27,725) | | | $ | 15.52 | | | | | |
Expired | (188,912) | | | $ | 35.58 | | | | | |
Options outstanding at January 29, 2022 | 3,097,158 | | | $ | 16.58 | | | 6.37 | | $ | 17,664 | |
| | | | | | | |
Exercisable at January 29, 2022 | 1,827,018 | | | $ | 18.50 | | | 5.41 | | $ | 8,028 | |
| | | | | | | |
|
| | | | | | | | | | | | |
| Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value ($000’s) |
Options outstanding at January 28, 2017 | 2,857,012 |
| | $ | 24.30 |
| | | | |
|
Granted | 1,283,175 |
| | 11.22 |
| | | | |
|
Exercised | (123,775 | ) | | 11.22 |
| | | | |
|
Forfeited | (88,625 | ) | | 25.39 |
| | | | |
|
Expired | (15,375 | ) | | 41.14 |
| | | | |
|
Options outstanding at February 3, 2018 | 3,912,412 |
| | $ | 20.33 |
| | 4.79 | | $ | 3,930 |
|
Exercisable at February 3, 2018 | 2,232,456 |
| | $ | 24.56 |
| | 6.52 | | $ | 668 |
|
Options exercisable and expected to vest at February 3, 2018 | 3,912,412 |
| | $ | 20.33 |
| | 4.79 | | $ | 3,930 |
|
The fair value of each stock option was estimated on the grant date using the Black-Scholes option-pricing model with themodel. There were 0 stock options granted during fiscal 2022. The following weighted average assumptions were used for grants during fiscal 2018, fiscal 2017 and fiscal 2016:grants:
| | | | | | | | | | | | | | |
| | | | Year Ended | | Year Ended |
Valuation Assumptions | | | | Jan 30, 2021 | | Feb 1, 2020 |
Risk-free interest rate | | | | 0.3 | % | | 2.3 | % |
Expected stock price volatility | | | | 91.6 | % | | 48.9 | % |
Expected dividend yield | | | | 5.1 | % | | 3.4 | % |
Expected life of stock options | | | | 4.3 years | | 4.4 years |
|
| | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
Valuation Assumptions | Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 |
Risk-free interest rate | 1.5 | % | | 1.0 | % | | 1.0 | % |
Expected stock price volatility | 37.1 | % | | 35.4 | % | | 36.7 | % |
Expected dividend yield | 8.0 | % | | 4.8 | % | | 4.7 | % |
Expected life of stock options (in years) | 4.4 |
| | 4.2 |
| | 3.8 |
|
The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected stock price volatility is determined based on an average of both historical volatility and implied volatility. Implied volatility is derived from exchange traded options on the Company’s common stock.The expected dividend yield is based on the Company’s history and expectations of dividend payouts. The expected life is determined based on historical trends.
The weighted average grant date fair value of options granted was $1.57, $3.53$4.41 and $3.75$5.50 during fiscal 2018, fiscal 20172021 and fiscal 2016,2020, respectively. The total intrinsic value of stock options exercised was $0.7$1.8 million, $4.0 million and $2.9 million during fiscal 20182022, fiscal 2021 and minimal during fiscal 2017. During fiscal 2016, the total intrinsic value of stock options exercised was $0.1 million.2020, respectively. The intrinsic value of stock options is defined as the difference between the Company’s stock price on the exercise date and the grant date exercise price. The total cash received from option exercises was $1.4$3.3 million, $0.2$6.2 million and $0.3$6.6 million during fiscal 2018,2022, fiscal 20172021 and fiscal 2016,2020, respectively.
The compensation expense included in SG&A expense recognized was $2.3$3.5 million before the recognized income tax benefit of $0.8 million during fiscal 2018.2022. As of February 3, 2018,January 29, 2022, there was approximately $3.7$4.3 million of unrecognized compensation cost related to nonvested stock options. This cost is expected to be recognized over a weighted average period of 1.5 years.1.2 years. The excess tax shortfall included in cash flows from operating activities related to stock option activity was minimalimmaterial for fiscal 2018.
2022.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock awards/units
The following table summarizes the nonvested stock awards/units activity under all of the Company’s stock plans during fiscal 2018:plans:
| | | | | | | Number of Awards/Units | | Weighted Average Grant Date Fair Value |
| Number of Awards/Units | | Weighted Average Grant Date Fair Value | |
Nonvested at January 28, 2017 | 1,686,204 |
| | $ | 18.80 |
| |
Nonvested at January 30, 2021 | | Nonvested at January 30, 2021 | 2,178,690 | | | $ | 13.16 | |
Granted | 1,969,619 |
| | 11.41 |
| Granted | 1,199,825 | | | $ | 24.21 | |
Vested | (1,052,796 | ) | | 17.52 |
| Vested | (783,276) | | | $ | 16.87 | |
Forfeited | (138,461 | ) | | 14.94 |
| Forfeited | (319,646) | | | $ | 20.17 | |
Nonvested at February 3, 2018 | 2,464,566 |
| | $ | 13.66 |
| |
Nonvested at January 29, 2022 | | Nonvested at January 29, 2022 | 2,275,593 | | | $ | 16.72 | |
The following table summarizes the activity for nonvested performance-based units and nonvested market-based units included in the table above duringabove:
| | | | | | | | | | | | | | | | | | | | | | | |
| Performance-Based Units | | Market-Based Units |
| Number of Units | | Weighted Average Grant Date Fair Value | | Number of Units | | Weighted Average Grant Date Fair Value |
Nonvested at January 30, 2021 | 769,632 | | | $ | 16.15 | | | 509,012 | | | $ | 8.67 | |
Granted1 | 242,898 | | | $ | 26.40 | | | 494,623 | | | $ | 21.48 | |
Vested1 | (166,761) | | | $ | 14.07 | | | (125,822) | | | $ | 20.28 | |
Forfeited | (201,956) | | | $ | 21.83 | | | — | | | $ | — | |
Nonvested at January 29, 2022 | 643,813 | | | $ | 18.78 | | | 877,813 | | | $ | 14.22 | |
1Amounts include, as a result of the achievement of certain market-based vesting conditions, 41,955 shares that vested in addition to the original target number of shares granted in fiscal 2018:
|
| | | | | | | | | | | | | |
| Performance-Based Units | | Market-Based Units |
| Number of Units | | Weighted Average Grant Date Fair Value | | Number of Units | | Weighted Average Grant Date Fair Value |
Nonvested at January 28, 2017 | 787,849 |
| | $ | 19.17 |
| | 323,825 |
| | $ | 16.63 |
|
Granted | 818,416 |
| | 11.17 |
| | 309,118 |
| | 12.03 |
|
Vested | (290,645 | ) | | 19.85 |
| | (244,466 | ) | | 17.72 |
|
Forfeited | (14,699 | ) | | 16.60 |
| | — |
| | — |
|
Nonvested at February 3, 2018 | 1,300,921 |
| | $ | 14.01 |
| | 388,477 |
| | $ | 12.28 |
|
2019.The fair value of each market-based nonvested stock unit was estimated on the grant date using the Monte Carlo simulation with thesimulation. There were 0 new market-based nonvested stock units granted during fiscal 2020. The following assumptions were used for the grants during fiscal 2018, fiscal 2017 and fiscal 2016:grants:
| | | | | | | | | | | | | |
| | | Year Ended | | Year Ended |
Valuation Assumptions | | | Jan 29, 2022 | | Jan 30, 2021 |
Risk-free interest rate | | | 0.6 | % | | 0.2 | % |
Expected stock price volatility | | | 78.4 | % | | 62.8 | % |
Expected dividend yield | | | — | % | | — | % |
Expected life of market-based awards | | | 3.5 years | | 2.6 years |
|
| | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
Valuation Assumptions | Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 |
Risk-free interest rate | 1.4 | % | | 0.9 | % | | 0.9 | % |
Expected stock price volatility | 39.7 | % | | 36.2 | % | | 38.6 | % |
Expected dividend yield | — | % | | — | % | | — | % |
Expected life of market-based awards (in years) | 2.8 |
| | 2.8 |
| | 2.8 |
|
The weighted average grant date fair value for the total nonvested stock awards/units granted was $11.41, $18.01$24.21, $8.65 and $18.79$19.14 during fiscal 2018,2022, fiscal 20172021 and fiscal 2016,2020, respectively. The total fair value at grant date of previously nonvested stock awards/units that were vested during fiscal 2018,2022, fiscal 20172021 and fiscal 20162020 was $18.4$13.2 million, $14.7$22.9 million and $14.0$16.6 million, respectively. During fiscal 2018,2022, fiscal 20172021 and fiscal 2016,2020, the total intrinsic value of nonvested stock awards/units that vested was $12.6$15.9 million, $9.4$22.1 million and $11.0$16.8 million, respectively. The total intrinsic value of nonvested stock awards/units outstanding and unvested as of February 3, 2018January 29, 2022 was $36.0 million.$48.7 million.
The compensation expense included in SG&A expense recognized during fiscal 20182022 was $16.3$17.4 million before the recognized income tax benefit of $5.6 million.$3.9 million. As of February 3, 2018,January 29, 2022, there was approximately $26.9$23.8 million of total unrecognized compensation cost related to nonvested stock awards/units. This cost is expected to be recognized over a weighted average period of 1.6 years.1.8 years. The excess tax shortfallwindfall of $1.3$0.9 million related to stock award/unit activity was included in cash flows from operating activities for fiscal 2018.2022.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ESPP
The Company’s ESPP allows qualified employees (as(as defined) to participate in the purchase of designated shares of the Company’s common stock at a price equal to 85% of the lower of the closing price at the beginning or
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
end of each quarterly stock purchase period. The ESPP requires participants to hold any shares purchased under the ESPP for a minimum period of six months after purchase. In addition, all Company employees are subject to the terms of the Company’s securities trading policy which generally prohibits the purchase or sale of any Company securities during the two weeks before the end of each fiscal quarter through two days after the public announcement by the Company of its earnings for that period. The Company has 4,000,000 shares of common stock registered under the ESPP. The Company’s ESPP will remain in effect through March 11, 2022.
During fiscal 2018,2022, fiscal 20172021 and fiscal 2016, 54,3002020, 38,144 shares, 44,48686,780 shares and 40,84653,424 shares of the Company’s common stock were issued pursuant to the ESPP at an average price of $10.45, $12.56$11.81, $11.82 and $16.17$14.65 per share, respectively.
The fair value of stock compensation expense associated with the Company’s ESPP was estimated on the date of grant using the Black-Scholes option-pricing valuation model with the following weighted average assumptions used for grants during fiscal 2018, fiscal 2017 and fiscal 2016.grants:
| | | | | | | | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
Valuation Assumptions | Jan 29, 2022 | | Jan 30, 2021 | | Feb 1, 2020 |
Risk-free interest rate | 0.0 | % | | 0.1 | % | | 2.0 | % |
Expected stock price volatility | 50.4 | % | | 145.9 | % | | 51.7 | % |
Expected dividend yield | 2.4 | % | | 1.4 | % | | 3.4 | % |
Expected life of ESPP options | 3 months | | 3 months | | 3 months |
|
| | | | | | | | |
| Year Ended | | Year Ended | | Year Ended |
Valuation Assumptions | Feb 3, 2018 | | Jan 28, 2017 | | Jan 30, 2016 |
Risk-free interest rate | 1.0 | % | | 0.3 | % | | 0.1 | % |
Expected stock price volatility | 45.8 | % | | 41.1 | % | | 34.9 | % |
Expected dividend yield | 7.6 | % | | 6.2 | % | | 4.7 | % |
Expected life of ESPP options (in months) | 3 |
| | 3 |
| | 3 |
|
The weighted average grant date fair value of ESPP options granted during fiscal 2018,2022, fiscal 20172021 and fiscal 20162020 was $2.85, $3.32$5.44, $3.32 and $4.06,$4.29, respectively.
(20)(21) Fair Value Measurements
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
•Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
•Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e. interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
•Level 3—Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of February 3, 2018 and January 28, 2017(in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at Feb 3, 2018 | | Fair Value Measurements at Jan 28, 2017 |
Recurring Fair Value Measures | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | | |
Foreign exchange currency contracts | | $ | — |
| | $ | 51 |
| | $ | — |
| | $ | 51 |
| | $ | — |
| | $ | 9,868 |
| | $ | — |
| | $ | 9,868 |
|
Interest rate swap | | — |
| | 1,460 |
| | — |
| | 1,460 |
| | — |
| | 876 |
| | — |
| | $ | 876 |
|
Total | | $ | — |
| | $ | 1,511 |
| | $ | — |
| | $ | 1,511 |
| | $ | — |
| | $ | 10,744 |
| | $ | — |
| | $ | 10,744 |
|
Liabilities: | | | | | | | | | | | | | | | | |
Foreign exchange currency contracts | | $ | — |
| | $ | 18,089 |
| | $ | — |
| | $ | 18,089 |
| | $ | — |
| | $ | 1,424 |
| | $ | — |
| | $ | 1,424 |
|
Deferred compensation obligations | | — |
| | 13,476 |
| | — |
| | 13,476 |
| | — |
| | 11,184 |
| | — |
| | 11,184 |
|
Total | | $ | — |
| | $ | 31,565 |
| | $ | — |
| | $ | 31,565 |
| | $ | — |
| | $ | 12,608 |
| | $ | — |
| | $ | 12,608 |
|
There were no transfers of financial instruments between the three levels of fair value hierarchy during fiscal 2018 and fiscal 2017. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at Jan 29, 2022 | | Fair Value Measurements at Jan 30, 2021 |
Recurring Fair Value Measures | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | | |
Foreign exchange currency contracts | | $ | — | | | $ | 7,133 | | | $ | — | | | $ | 7,133 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | 7,133 | | | $ | — | | | $ | 7,133 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Liabilities: | | | | | | | | | | | | | | | | |
Foreign exchange currency contracts | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,481 | | | $ | — | | | $ | 4,481 | |
Interest rate swap | | — | | | 74 | | | — | | | 74 | | | — | | | 999 | | | — | | | 999 | |
Deferred compensation obligations | | — | | | 15,794 | | | — | | | 15,794 | | | — | | | 15,612 | | | — | | | 15,612 | |
Total | | $ | — | | | $ | 15,868 | | | $ | — | | | $ | 15,868 | | | $ | — | | | $ | 21,092 | | | $ | — | | | $ | 21,092 | |
Foreign exchange currency contracts aremay be entered into by the Company principally to hedge the future payment of inventory and intercompany transactions by non-U.S. subsidiaries. Periodically, the Company may also use foreign exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries. The fair values of the Company’s foreign exchange currency contracts are based on quoted foreign exchange forward rates at the reporting date. The fair values of the interest rate swaps are based upon inputs corroborated by observable market data. Deferred compensation obligations to employees are adjusted based on changes in the fair value of the underlying employee-directed investments. Fair value of these obligations is based upon inputs corroborated by observable market data.
During fiscal 2018, theThe Company invested €0.5included €3.6 million ($0.54.0 million) in a private equity fund, which was includedand €2.4 million ($3.0 million) in other assets in the Company’s consolidated balance sheet as of February 3, 2018.sheets related to its investment in a private equity fund for the periods ended January 29, 2022 and January 30, 2021, respectively. As permitted in accordance with authoritative guidance, the Company uses net asset value per share as a practical expedient to measure the fair value of this investment and has not included this investment in the fair value hierarchy as disclosed above. During fiscal 2022 and fiscal 2021, the Company funded contributions of €1.3 million ($1.5 million) and €1.3 million ($1.6 million), respectively, in this investment. During the year ended January 29, 2022 and February 1, 2020, the Company recorded unrealized losses of €0.1 million ($0.1 million) and €0.1 million ($0.1 million), respectively, in other income (expense) as a result of changes in the value of the private equity investment. During the year ended January 30, 2021, the Company recorded immaterial unrealized losses in other income (expense) as a result of changes in the value of the private equity investment. As of February 3, 2018,January 29, 2022, the Company had an unfunded commitment to invest an additional €4.5€1.0 million ($5.71.1 million) in the private equity fund.
The fair values of the Company’s debt instruments (see Note 8) are based on the amount of future cash flows associated with each instrument discounted using the Company’s incremental borrowing rate. As of January 29, 2022 and January 30, 2021, the carrying value of all financial instruments was not materially different from fair value, as the interest rates on the Company’s debt approximated rates currently available to the Company. The fair value of the Company’s convertible senior notes (see Note 10) is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy.
The carrying amount of the Company’s remaining financial instruments, which principally include cash and cash equivalents, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments. The fair values
GUESS?, as the interest rates on the Company’s debt approximated rates currently available to the Company.INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (21)(22) Derivative Financial Instruments
Hedging Strategy
Foreign Exchange Currency Contracts
The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations.The Company has entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges.
The Company’s primary objective is to hedge the variability in forecasted cash flows due to the foreign currency risk. Various transactions that occur primarily in Europe, Canada, South Korea, China, Hong Kong, and Mexico are denominated in U.S. dollars, British pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
denominateddollar-denominated purchases of merchandise and U.S. dollardollar- and British pound denominatedpound-denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. Further, there are certain real estate leases which are denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). As a result, the Company may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end. The Company enters into derivative financial instruments, including forward exchange currency contracts, to offset some but not all of the exchange risk oncertain of these anticipated foreign currency transactions.
Periodically, the Company may also use foreign exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries.subsidiaries.
Interest Rate Swap Agreements
The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Refer to Note 8 for further information.
The impact of the credit risk of the counterparties to the derivative contracts is considered in determining the fair value of the foreign exchange currency contracts and interest rate swap agreements. As of February 3, 2018,January 29, 2022, credit risk has not had a significant effect on the fair value of the Company’s foreign exchange currency contracts and interest rate swap agreements.
Hedge Accounting Policy
Foreign Exchange Currency Contracts
U.S. dollar forward contracts are used to hedge forecasted merchandise purchases over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold. The Company also hedges forecasted intercompany royalties over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in other income and expense in the period in which the royalty expense is incurred.
The Company has also used U.S. dollar forward contracts to hedge the net investments of certain of the Company’s international subsidiaries over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in earnings (loss) until the sale or liquidation of the hedged net investment.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company also has foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense.(expense).
Interest Rate Swap Agreements
Interest rate swap agreements are used to hedge the variability of the cash flows in interest payments associated with the Company’s floating-rate debt. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
Periodically, the Company may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(expense).
Summary of Derivative Instruments
The fair value of derivative instruments in the consolidated balance sheets as of February 3, 2018 and January 28, 2017is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Fair Value at Jan 29, 2022 | | Fair Value at Jan 30, 2021 | | Derivative Balance Sheet Location |
ASSETS: | | | | | |
Derivatives designated as hedging instruments: | | | | | |
Cash flow hedges: | | | | | |
Foreign exchange currency contracts | $ | 5,999 | | | $ | — | | | Other current assets/Other assets |
| | | | | |
| | | | | |
Derivatives not designated as hedging instruments: | | | | | |
Foreign exchange currency contracts | 1,134 | | | — | | | Other current assets/Other assets |
Total | $ | 7,133 | | | $ | — | | | |
LIABILITIES: | | | | | |
Derivatives designated as hedging instruments: | | | | | |
Cash flow hedges: | | | | | |
Foreign exchange currency contracts | $ | — | | | $ | 3,326 | | | Accrued expenses/Other long-term liabilities |
Interest rate swaps | 74 | | | 999 | | | Other long-term liabilities |
Total derivatives designated as hedging instruments | 74 | | | 4,325 | | | |
Derivatives not designated as hedging instruments: | | | | | |
Foreign exchange currency contracts | — | | | 1,155 | | | Accrued expenses |
| | | | | |
| | | | | |
Total | $ | 74 | | | $ | 5,480 | | | |
|
| | | | | | | | | | |
| | Derivative Balance Sheet Location | | Fair Value at Feb 3, 2018 | | Fair Value at Jan 28, 2017 |
ASSETS: | | | | | | |
Derivatives designated as hedging instruments: | | | | | | |
Cash flow hedges: | | | | | | |
Foreign exchange currency contracts | | Other current assets/ Other assets | | $ | 41 |
| | $ | 6,072 |
|
Interest rate swap | | Other assets | | 1,460 |
| | 876 |
|
Total derivatives designated as hedging instruments | | | | 1,501 |
| | 6,948 |
|
Derivatives not designated as hedging instruments: | | | | | | |
Foreign exchange currency contracts | | Other current assets/ Other assets | | 10 |
| | 3,796 |
|
Total | | | | $ | 1,511 |
| | $ | 10,744 |
|
LIABILITIES: | | | | | | |
Derivatives designated as hedging instruments: | | | | | | |
Cash flow hedges: | | | | | | |
Foreign exchange currency contracts | | Accrued expenses/ Other long-term liabilities | | $ | 13,789 |
| | $ | 1,250 |
|
Derivatives not designated as hedging instruments: | | | | | | |
Foreign exchange currency contracts | | Accrued expenses | | 4,300 |
| | 174 |
|
Total | | | | $ | 18,089 |
| | $ | 1,424 |
|
Derivatives Designated as Hedging Instruments
Foreign Exchange Currency Contracts Designated as Cash Flow Hedges
During fiscal 2018,2022, the Company purchased U.S. dollar forward contracts in Europe and Canada totaling US$147.6197.0 million and US$25.7 million, respectively, that were designated as cash flow hedges. As of February 3, 2018,January 29, 2022, the Company had forward contracts outstanding for its European and Canadian operations of US$145.8146.0 million and US$38.7 million, respectively, to hedge forecasted merchandise purchases, and intercompany royalties, which are expected to mature over the next 1714 months. At January 28, 2017, the Company had forward contracts outstanding for its European and Canadian operations of US$104.2 million and US$66.9 million, respectively, that were designated as cash flow hedges.
As of February 3, 2018,January 29, 2022, accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a net unrealized lossgain of approximately $15.5$7.3 million, net of tax, of which $10.0$5.4 million will be recognized in cost of product sales or other expense over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current year-end values.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At January 30, 2021, the Company had forward contracts outstanding for its European operations of US$100.0 million that were designated as cash flow hedges.
Interest Rate Swap Agreement Designated as Cash Flow Hedge
During fiscal 2017, the Company entered into an interest rate swap agreement with a notional amount of $21.5 million, designated as a cash flow hedge, to hedge the variability of cash flows in interest payments associated with the Company’s floating-rate debt. This interest rate swap agreement matures in January 2026 and converts the nature of the Company’s real estate secured term loan from LIBOR floating-rate debt to fixed-rate debt, resulting in a swap fixed rate of approximately 3.06%.
As of February 3, 2018,January 29, 2022, accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized gainloss of approximately $1.1$0.1 million, net of tax, which will be recognized in interest expense afterover the following 12 months, at the then current values on a pre-tax basis, which can be different than the current year-end values.
The following summarizes the gains (losses) before income taxes recognized on the derivative instruments designated as cash flow hedges in OCI and net earnings (loss) (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended January 29, 2022 |
| Gain Recognized in OCI | | Loss Reclassified from Accumulated OCI into Earnings | | Location of Loss Reclassified from Accumulated OCI into Earnings |
| | | | | |
Derivatives designated as cash flow hedges: | | | | | |
Foreign exchange currency contracts | $ | 10,807 | | | $ | (2,051) | | | Cost of product sales |
| | | | | |
| | | | | |
Interest rate swap | 653 | | | (272) | | | Interest expense |
| | | | | | | | | | | | | | | | | |
| Year Ended January 30, 2021 |
| Loss Recognized in OCI | | Gain (Loss) Reclassified from Accumulated OCI into Loss | | Location of Gain (Loss) Reclassified from Accumulated OCI into Loss |
| | | | | |
Derivatives designated as cash flow hedges: | | | | | |
Foreign exchange currency contracts | $ | (5,614) | | | $ | 6,298 | | | Cost of product sales |
| | | | | |
| | | | | |
Interest rate swap | (832) | | | (181) | | | Interest expense |
| | | | | | | | | | | | | | | | | | | |
| Year Ended February 1, 2020 |
| Gain (Loss) Recognized in OCI | | Gain Reclassified from Accumulated OCI into Earnings | | Location of Gain Reclassified from Accumulated OCI into Earnings | | |
| | | | | | | |
Derivatives designated as cash flow hedges: | | | | | | | |
Foreign exchange currency contracts | $ | 10,557 | | | $ | 7,776 | | | Cost of product sales | | |
| | | | | | | |
| | | | | | | |
Interest rate swap | (1,253) | | | 128 | | | Interest expense | | |
The following summarizes net after income tax derivative activity recorded in accumulated other comprehensive income (loss) (in thousands):
| | | | | | | | | | | | |
| | Year Ended Jan 29, 2022 | | Year Ended Jan 30, 2021 |
Beginning balance gain (loss) | | $ | (4,876) | | | $ | 6,300 | |
| | | | |
Net gains (losses) from changes in cash flow hedges | | 10,121 | | | (5,709) | |
Net (gains) losses reclassified to earnings (loss) | | 2,035 | | | (5,467) | |
Ending balance gain (loss) | | $ | 7,280 | | | $ | (4,876) | |
Foreign Exchange Currency Contracts Not Designated as Hedging Instruments
As of January 29, 2022, the Company had euro foreign exchange currency contracts to purchase US$19.0 million expected to mature over the next two months.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the gains (losses) before taxes recognized on the derivative instruments designated as cash flow hedges in accumulated other comprehensive income (loss) and net earnings (loss) for fiscal 2018, fiscal 2017 and fiscal 2016 (in thousands):
|
| | | | | | | | | | | | | |
| Gain (Loss) Recognized in OCI | | Location of Gain (Loss) Reclassified from Accumulated OCI into Loss (1) | | Gain (Loss) Reclassified from Accumulated OCI into Loss | | Loss Reclassified from Accumulated OCI to Retained Earnings (2) |
| Year Ended Feb 3, 2018 | | | Year Ended Feb 3, 2018 | | Year Ended Feb 3, 2018 |
Derivatives designated as cash flow hedges: | | | | | | | |
Foreign exchange currency contracts | $ | (22,497 | ) | | Cost of product sales | | $ | 14 |
| | $ | — |
|
Foreign exchange currency contracts | $ | (1,163 | ) | | Other income/expense | | $ | (583 | ) | | $ | — |
|
Interest rate swap | $ | 272 |
| | Interest expense | | $ | (87 | ) | | $ | (225 | ) |
|
| | | | | | | | | |
| Gain Recognized in OCI | | Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings (1) | | Gain (Loss) Reclassified from Accumulated OCI into Earnings |
| Year Ended Jan 28, 2017 | | | Year Ended Jan 28, 2017 |
Derivatives designated as cash flow hedges: | | | | | |
Foreign exchange currency contracts | $ | — |
| | Cost of product sales | | $ | 3,518 |
|
Foreign exchange currency contracts | $ | 227 |
| | Other income/expense | | $ | 301 |
|
Interest rate swap | $ | 660 |
| | Interest expense | | $ | (216 | ) |
|
| | | | | | | | | |
| Gain Recognized in OCI | | Location of Gain Reclassified from Accumulated OCI into Earnings (1) | | Gain Reclassified from Accumulated OCI into Earnings |
| Year Ended Jan 30, 2016 | | | Year Ended Jan 30, 2016 |
Derivatives designated as cash flow hedges: | | | | | |
Foreign exchange currency contracts | $ | 9,301 |
| | Cost of product sales | | $ | 8,314 |
|
Foreign exchange currency contracts | $ | 500 |
| | Other income/expense | | $ | 833 |
|
| |
(1) | The Company recognized gains of $2.7 million, $0.9 million and $0.1 million resulting from the ineffective portion related to foreign exchange currency contracts in interest income during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. There was no ineffectiveness recognized related to the interest rate swap during fiscal 2018 and fiscal 2017.
|
| |
(2) | During the fourth quarter of fiscal 2018, the Company early adopted authoritative guidance which addresses certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the Tax Reform enacted in December 2017. As a result, the Company recorded a cumulative adjustment to reduce retained earnings by $0.2 million with a corresponding increase to accumulated other comprehensive income (loss) related to the Company’s interest rate swap designated as a cash flow hedge.
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes net after-tax derivative activity recorded in accumulated other comprehensive income (loss) (in thousands):
|
| | | | | | | |
| Year Ended Feb 3, 2018 | | Year Ended Jan 28, 2017 |
Beginning balance gain | $ | 5,400 |
| | $ | 7,252 |
|
Net gains (losses) from changes in cash flow hedges | (20,408 | ) | | 1,059 |
|
Net (gains) losses reclassified to earnings (loss) | 414 |
| | (2,911 | ) |
Net losses reclassified to retained earnings (1) | 225 |
| | — |
|
Ending balance gain (loss) | $ | (14,369 | ) | | $ | 5,400 |
|
| |
(1) | During the fourth quarter of fiscal 2018, the Company early adopted authoritative guidance which addresses certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the Tax Reform enacted in December 2017. As a result, the Company recorded a cumulative adjustment to reduce retained earnings by $0.2 million with a corresponding increase to accumulated other comprehensive income (loss) related to the Company’s interest rate swap designated as a cash flow hedge.
|
Derivatives Not Designated as Hedging Instruments
As of February 3, 2018, the Company had euro foreign exchange currency contracts to purchase US$68.2 million expected to mature over the next 12 months and Canadian dollar foreign exchange currency contracts to purchase US$17.6 million expected to mature over the next 11 months.
At January 28, 2017, the Company had euro foreign exchange currency contracts to purchase US$81.4 million and Canadian dollar foreign exchange currency contracts to purchase US$13.9 million.
The following table summarizes the gains (losses) before taxes recognized on the derivative instruments not designated as hedging instruments in other income and expense for fiscal 2018, fiscal 2017 and fiscal 2016(expense) (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Location of Gain (Loss) Recognized in Earnings (Loss) | | Gain (Loss) Recognized in Earnings (Loss) |
| | | Year Ended Jan 29, 2022 | | Year Ended Jan 30, 2021 | | Year Ended Feb 1, 2020 |
Derivatives not designated as hedging instruments: | | | | | | | | |
Foreign exchange currency contracts | | Other income (expense) | | $ | 1,941 | | | $ | (5,117) | | | $ | 1,254 | |
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At January 30, 2021, the Company had euro foreign exchange currency contracts to purchase US$19.0 million.
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| | Location of Gain (Loss) Recognized in Earnings (Loss) | | Gain (Loss) Recognized in Earnings (Loss) |
| | | Year Ended Feb 3, 2018 | | Year Ended Jan 28, 2017 | | Year Ended Jan 30, 2016 |
Derivatives not designated as hedging instruments: | | | | | | | | |
Foreign exchange currency contracts | | Other income/expense | | $ | (10,511 | ) | | $ | 2,427 |
| | $ | 4,346 |
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Interest rate swap | | Other income/expense | | $ | — |
| | $ | 38 |
| | $ | 179 |
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GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(22)(23) Share Repurchase Program
On June 26, 2012, the Company’s Board of Directors authorized a program to repurchase up to $500 million of the Company’s common stock. On August 23, 2021, the Company’s Board of Directors terminated the previously authorized 2012 share repurchase program (which had $47.8 million capacity remaining) and authorized a new program (the “2021 Share Repurchase Program”) to repurchase, from time-to-time and as market and business conditions warrant, up to $500$200 million of the Company’s common stock. As of January 29, 2022, the Company had remaining authority under the program to purchase $149.0 million of its common stock. On March 14, 2022, the Board of Directors expanded its repurchase authorization by $100 million, leaving a new capacity of $249.0 million. Refer to “Part IV. Financial Statements – Note 24 – Subsequent Events” in this Form 10-K for further detail.
Repurchases under the program may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under the program, which may be discontinued at any time, without prior notice. During fiscal 2018,2022, the Company repurchased 3,866,3872,289,292 shares under the program at an aggregate cost of $56.1 million, of which $6.0 million was settled subsequent to year end.$51.0 million. During fiscal 2017,2021, the Company repurchased 289,9684,000,000 shares under the previous program at an aggregate cost of $3.5$38.8 million. During fiscal 2016,2020, the Company repurchased 2,000,00016,739,740 shares at an aggregate cost of $44.0 million. As$288.1 million, which is inclusive of February 3, 2018,the shares repurchased under the April 26, 2019 accelerated share repurchase (“ASR”) agreement (“2019 ASR Contract”).
On April 26, 2019, pursuant to existing stock repurchase authorizations, the Company had remaining authority underentered into an ASR Contract with JPMorgan Chase Bank, National Association (in such capacity, the program“2019 ASR Counterparty”), to purchase $392.2repurchase an aggregate of $170 million of itsthe Company’s common stock.
(23) Subsequent Events
Share Repurchases
Subsequent Under the 2019 ASR Contract, the Company made an initial payment of $170 million to year end,the 2019 ASR Counterparty and received an initial delivery of approximately 5.2 million shares of common stock, which represented approximately $102 million (or 60%) of the 2019 ASR Contract. The Company received a final delivery of an additional 5.4 million shares, or $68 million, under its 2019 ASR Contract during the third quarter of fiscal 2020. The final share amount was determined based on the daily volume-weighted average price since the effective date of the 2019 ASR Contract, less the applicable contractual discount. When combined with the 5.2 million upfront shares received at the inception of the 2019 ASR in April 2019, the Company repurchased approximately 1.110.6 million of its shares under its share repurchase programthe 2019 ASR at an aggregate costaverage repurchase price of $17.6 million.$16.09 per share. All shares were repurchased in accordance with the Company’s publicly announced 2019 ASR program, which was completed during the third quarter of fiscal 2020. The shares delivered under the 2019 ASR Contract reduced the Company’s outstanding shares and its weighted average number of common shares outstanding for purposes of calculating basic and diluted earnings per share.
(24) Subsequent Events
Dividends
On March 21, 2018,16, 2022, the Company announced a regular quarterly cash dividend of $0.225$0.225 per share on the Company’s common stock. The cash dividend will be paid on April 20, 201815, 2022 to shareholders of record as of the close of business on April 4, 2018.
March 30, 2022. In connection with the increase to the quarterly cash dividend, the Company
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to decrease) of the convertible senior notes in accordance with the terms of the indenture governing the convertible senior notes, to be effective as of March 29, 2022. A corresponding adjustment is expected to be made to the strike prices with respect to the convertible note hedges and the warrants entered into by the Company in connection with the offering of the convertible senior notes, with the strike price decreased and the number of options increased in accordance with the terms of the convertible note hedge confirmations and warrant confirmations, respectively.
Share Repurchase
On March 14, 2022, the Board of Directors expanded its repurchase authorization by $100 million, leaving a new capacity of $249.0 million.
On March 18, 2022, pursuant to existing stock repurchase authorizations, the Company entered into an ASR agreement (the “2022 ASR Contract”) with Barclays Bank PLC (in such capacity, the “2022 ASR Counterparty”), to repurchase an aggregate of $175.0 million of the Company’s common stock.
Under the 2022 ASR Contract, the Company made a payment of $175.0 million to the 2022 ASR Counterparty and received an initial delivery of 3.3 million shares of its common stock on March 21, 2022, representing approximately 40% ($70.0 million) of the total shares expected to be repurchased under the 2022 ASR Contract. The exact number of shares the Company will repurchase under the 2022 ASR Contract will be based generally upon the average daily volume weighted average price of the common stock during the repurchase period, less a discount. Final settlement of the transactions under the 2022 ASR Contract is expected to occur by the end of the third quarter of 2022.
SCHEDULE II
GUESS?, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended February 3, 2018, January 28, 2017 and 29, 2022, January 30, 20162021 and February 1, 2020
(in thousands)
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| | Balance at Beginning of Period | | Costs Charged to Expenses | | Deductions and Write-offs | | Balance at End of Period |
Description | | | | | | | | |
As of January 29, 2022 | | | | | | | | |
Allowance for doubtful accounts | | $ | 14,200 | | | $ | 4,670 | | | $ | (7,831) | | | $ | 11,039 | |
Allowance for markdowns | | 16,245 | | | 21,159 | | | (18,390) | | | 19,014 | |
Allowance for sales returns | | 27,193 | | | 122,672 | | | (111,446) | | | 38,419 | |
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Allowance for deferred tax asset valuation | | 54,131 | | | 1,147 | | | — | | | 55,278 | |
Total | | $ | 111,769 | | | $ | 149,648 | | | $ | (137,667) | | | $ | 123,750 | |
As of January 30, 2021 | | | | | | | | |
Allowance for doubtful accounts | | $ | 8,431 | | | $ | 6,033 | | | $ | (264) | | | $ | 14,200 | |
Allowance for markdowns | | 12,562 | | | 25,942 | | | (22,259) | | | 16,245 | |
Allowance for sales returns | | 33,178 | | | 104,560 | | | (110,545) | | | 27,193 | |
Allowance for deferred tax asset valuation | | 30,760 | | | 23,371 | | | — | | | 54,131 |
Total | | $ | 84,931 | | | $ | 159,906 | | | $ | (133,068) | | | $ | 111,769 | |
As of February 1, 2020 | | | | | | | | |
Allowance for doubtful accounts | | $ | 8,540 | | | $ | 3,712 | | | $ | (3,821) | | | $ | 8,431 | |
Allowance for markdowns | | 12,121 | | | 36,979 | | | (36,538) | | | 12,562 | |
Allowance for sales returns | | 33,217 | | | 104,801 | | | (104,840) | | | 33,178 | |
Allowance for deferred tax asset valuation | | 32,810 | | | 738 | | | (2,788) | | | 30,760 | |
Total | | $ | 86,688 | | | $ | 146,230 | | | $ | (147,987) | | | $ | 84,931 | |
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| Balance at Beginning of Period | | Costs Charged to Expenses | | Deductions and Write-offs | | Balance at End of Period |
Description | | | | | | | |
As of February 3, 2018 | | | | | | | |
Allowance for doubtful accounts | $ | 13,313 |
| | $ | 9,447 |
| | $ | (9,420 | ) | | $ | 13,340 |
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Allowance for markdowns | 2,944 |
| | 42,485 |
| | (34,652 | ) | | 10,777 |
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Allowance for royalties receivable | 497 |
| | — |
| | (359 | ) | | 138 |
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Allowance for sales returns | 20,891 |
| | 83,593 |
| | (76,603 | ) | | 27,881 |
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Total | $ | 37,645 |
| | $ | 135,525 |
| | $ | (121,034 | ) | | $ | 52,136 |
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As of January 28, 2017 | | | | | | | |
Allowance for doubtful accounts | $ | 12,874 |
| | $ | 7,284 |
| | $ | (6,845 | ) | | $ | 13,313 |
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Allowance for markdowns | 2,196 |
| | 32,679 |
| | (31,931 | ) | | 2,944 |
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Allowance for royalties receivable | 411 |
| | 86 |
| | — |
| | 497 |
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Allowance for sales returns | 20,513 |
| | 74,278 |
| | (73,900 | ) | | 20,891 |
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Total | $ | 35,994 |
| | $ | 114,327 |
| | $ | (112,676 | ) | | $ | 37,645 |
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As of January 30, 2016 | | | | | | | |
Allowance for doubtful accounts | $ | 13,504 |
| | $ | 5,767 |
| | $ | (6,397 | ) | | $ | 12,874 |
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Allowance for markdowns | 2,549 |
| | 21,988 |
| | (22,341 | ) | | 2,196 |
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Allowance for royalties receivable | 253 |
| | 240 |
| | (82 | ) | | 411 |
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Allowance for sales returns | 17,727 |
| | 68,477 |
| | (65,691 | ) | | 20,513 |
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Total | $ | 34,033 |
| | $ | 96,472 |
| | $ | (94,511 | ) | | $ | 35,994 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| Guess?, Inc. |
| By: | /s/ CARLOS ALBERINI |
| | /s/ VICTOR HERREROCarlos Alberini Chief Executive Officer
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| Date: | Victor Herrero
Chief Executive Officer
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| Date: | March 29, 201824, 2022 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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/s/ CARLOSALBERINI | | Chief Executive Officer and Director (Principal Executive Officer) | March 24, 2022 |
Carlos Alberini | |
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/s/ VICTOR HERREROKATHRYN ANDERSON | | Chief Executive Officer and Director
(Principal Executive Officer)
| March 29, 2018 |
Victor Herrero | |
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/s/ SANDEEP REDDY
| | Chief Financial Officer (Principal Financial Officer and
Chief Accounting Officer)
| March 29, 201824, 2022 |
Sandeep ReddyKathryn Anderson | |
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/s/ PAUL MARCIANO
| | Executive Chairman, Chief Creative Officer
and Director
| March 29, 2018 |
Paul Marciano | |
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/s/ MAURICE MARCIANO
| | Chairman Emeritus and Director | March 29, 2018 |
Maurice Marciano | |
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/s/ GIANLUCA BOLLA
| | Director | March 29, 2018 |
Gianluca Bolla | |
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/s/ ANTHONY CHIDONI
| | Director | March 29, 2018 |
Anthony Chidoni | |
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/s/ JOSEPH GROMEK
| | Director | March 29, 2018 |
Joseph Gromek | |
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/s/ KAY ISAACSON-LEIBOWITZ
| | Director | March 29, 2018 |
Kay Isaacson-Leibowitz | |
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/s/ ALEX YEMENIDJIAN
| | Director | March 29, 2018 |
Alex Yemenidjian | |
Exhibit Index |
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Exhibit
Number
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| | Chief Creative Officer and Director | March 24, 2022 |
Paul Marciano | |
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| | Chairman of the Registrant (incorporated by reference from Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-4419) filed on July 30, 1996).Board and Director | March 24, 2022 |
Alex Yemenidjian | | |
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| | Loan, Guaranty and Security Agreement dated as of June 23, 2015, among the Registrant, Guess? Retail, Inc., Guess.com, Inc., Guess? Canada Corporation, the guarantors party thereto, the lenders party thereto and Bank of America, N.A., as agent for the lenders (incorporated by reference from the Registrant’s Current Report on Form 8-K filed June 24, 2015). |
| | Amendment Number One to Loan, Guaranty and Security Agreement dated as of February 16, 2016, among the Registrant, Guess? Retail, Inc., Guess.com, Inc., Guess? Canada Corporation, the guarantors party thereto, the lenders party thereto and Bank of America, N.A., as agent for the lenders (incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended January 30, 2016). |
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†101.INS | | XBRL Instance Document |
†101.SCH | | XBRL Taxonomy Extension Schema Document |
†101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
†101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
†101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
†101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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* | Management Contract or Compensatory Plan | | |
† | Filed herewith | | |
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/s/ ANTHONY CHIDONI | | Director | March 24, 2022 |
Anthony Chidoni | |
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/s/ LAURIE ANN GOLDMAN | | Director | March 24, 2022 |
Laurie Ann Goldman | |
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/s/ CYNTHIA LIVINGSTON | | Director | March 24, 2022 |
Cynthia Livingston | |
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/s/ MAURICE MARCIANO | | Director | March 24, 2022 |
Maurice Marciano | |
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/s/ DEBORAHWEINSWIG | | Director | March 24, 2022 |
Deborah Weinswig | |