UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 2020July 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-11893
GUESS?, INC.
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
Delaware | 95-3679695 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
1444 South Alameda Street |
Los Angeles, | California | 90021 |
90021 |
(Address of principal executive offices and zip code) |
(213) (213) 765-3100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| | | | | | | | | | | | | | | | |
Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
| | | | | |
Common Stock, par value $0.01 per share | | GES | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | | Accelerated filer | ☒ |
| | | | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
| | | | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
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| | | Emerging growth company | ☐ |
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| | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of August 31, 2020,27, 2021, the registrant had 63,610,47464,956,706 shares of Common Stock, $.01 par value per share, outstanding.
GUESS?, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
GUESS?, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) |
| | | | | | | |
| Aug 1, 2020 | | Feb 1, 2020 |
| (unaudited) | | |
ASSETS | |
| | |
|
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 327,970 |
| | $ | 284,613 |
|
Accounts receivable, net | 246,471 |
| | 327,281 |
|
Inventories | 419,427 |
| | 393,129 |
|
Other current assets | 80,069 |
| | 59,212 |
|
Total current assets | 1,073,937 |
| | 1,064,235 |
|
Property and equipment, net | 240,081 |
| | 288,112 |
|
Goodwill | 36,232 |
| | 34,777 |
|
Deferred tax assets | 62,444 |
| | 63,555 |
|
Restricted cash | 228 |
| | 215 |
|
Operating lease right-of-use assets | 766,853 |
| | 851,990 |
|
Other assets | 130,954 |
| | 126,078 |
|
| $ | 2,310,729 |
| | $ | 2,428,962 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
|
Current liabilities: | |
| | |
|
Current portion of borrowings and finance lease obligations | $ | 42,321 |
| | $ | 9,490 |
|
Accounts payable | 259,743 |
| | 232,761 |
|
Accrued expenses and other current liabilities | 192,667 |
| | 204,096 |
|
Current portion of operating lease liabilities | 235,749 |
| | 192,066 |
|
Total current liabilities | 730,480 |
| | 638,413 |
|
Convertible senior notes, net | 252,988 |
| | 247,363 |
|
Long-term debt and finance lease obligations | 66,069 |
| | 32,770 |
|
Long-term operating lease liabilities | 659,118 |
| | 714,079 |
|
Other long-term liabilities | 143,225 |
| | 130,259 |
|
| 1,851,880 |
| | 1,762,884 |
|
Redeemable noncontrolling interests | 4,021 |
| | 4,731 |
|
| | | |
Commitments and contingencies (Note 13) |
|
| |
|
|
| | | |
Stockholders’ equity: | |
| | |
|
Preferred stock, $.01 par value. Authorized 10,000,000 shares; no shares issued and outstanding | 0 |
| | 0 |
|
Common stock, $.01 par value. Authorized 150,000,000 shares; issued 142,843,839 and 142,867,947 shares, outstanding 63,614,749 and 65,848,510 shares, as of August 1, 2020 and February 1, 2020, respectively | 636 |
| | 658 |
|
Paid-in capital | 548,602 |
| | 563,004 |
|
Retained earnings | 952,707 |
| | 1,130,409 |
|
Accumulated other comprehensive loss | (131,609 | ) | | (139,910 | ) |
Treasury stock, 79,229,090 and 77,019,437 shares as of August 1, 2020 and February 1, 2020, respectively | (932,068 | ) | | (914,447 | ) |
Guess?, Inc. stockholders’ equity | 438,268 |
| | 639,714 |
|
Nonredeemable noncontrolling interests | 16,560 |
| | 21,633 |
|
Total stockholders’ equity | 454,828 |
| | 661,347 |
|
| $ | 2,310,729 |
| | $ | 2,428,962 |
|
GUESS?, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | | | | | | |
| Jul 31, 2021 | | Jan 30, 2021 |
| (unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 458,914 | | | $ | 469,110 | |
| | | |
Accounts receivable, net | 299,915 | | | 314,147 | |
Inventories | 430,289 | | | 389,144 | |
Other current assets | 74,771 | | | 60,123 | |
Total current assets | 1,263,889 | | | 1,232,524 | |
Property and equipment, net | 210,515 | | | 216,196 | |
Goodwill | 36,181 | | | 36,736 | |
Deferred tax assets | 71,878 | | | 72,417 | |
Restricted cash | 230 | | | 235 | |
Operating lease right-of-use assets | 727,636 | | | 764,804 | |
| | | |
Other assets | 146,572 | | | 142,956 | |
| $ | 2,456,901 | | | $ | 2,465,868 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of borrowings and finance lease obligations | $ | 21,193 | | | $ | 38,710 | |
Accounts payable | 285,578 | | | 300,427 | |
Accrued expenses and other current liabilities | 193,989 | | | 200,602 | |
Current portion of operating lease liabilities | 214,392 | | | 222,800 | |
Total current liabilities | 715,152 | | | 762,539 | |
Convertible senior notes, net | 264,604 | | | 258,614 | |
Long-term debt and finance lease obligations | 79,924 | | | 68,554 | |
| | | |
Long-term operating lease liabilities | 623,040 | | | 662,657 | |
Other long-term liabilities | 138,084 | | | 144,004 | |
Total long-term liabilities | 1,820,804 | | | 1,896,368 | |
Redeemable noncontrolling interests | 4,074 | | | 3,920 | |
| | | |
Commitments and contingencies (Note 13) | 0 | | 0 |
| | | |
Stockholders’ equity: | | | |
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 142,789,664 and 142,793,679 shares, outstanding 64,967,975 and 64,230,162 shares, as of July 31, 2021 and January 30, 2021, respectively | 650 | | | 642 | |
Paid-in capital | 555,765 | | | 553,111 | |
Retained earnings | 1,093,342 | | | 1,034,823 | |
Accumulated other comprehensive loss | (123,928) | | | (120,675) | |
Treasury stock, 77,821,689 and 78,563,517 shares as of July 31, 2021 and January 30, 2021, respectively | (915,511) | | | (924,238) | |
Guess?, Inc. stockholders’ equity | 610,318 | | | 543,663 | |
Nonredeemable noncontrolling interests | 21,705 | | | 21,917 | |
Total stockholders’ equity | 632,023 | | | 565,580 | |
| $ | 2,456,901 | | | $ | 2,465,868 | |
See accompanying notes to condensed consolidated financial statements.
GUESS?, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (in thousands, except per share data) (unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Aug 1, 2020 | | Aug 3, 2019 | | Aug 1, 2020 | | Aug 3, 2019 |
Product sales | $ | 386,392 |
| | $ | 664,678 |
| | $ | 633,709 |
| | $ | 1,182,551 |
|
Net royalties | 12,147 |
| | 18,542 |
| | 25,081 |
| | 37,360 |
|
Net revenue | 398,539 |
| | 683,220 |
| | 658,790 |
| | 1,219,911 |
|
Cost of product sales | 251,511 |
| | 417,554 |
| | 477,533 |
| | 772,296 |
|
Gross profit | 147,028 |
| | 265,666 |
| | 181,257 |
| | 447,615 |
|
Selling, general and administrative expenses | 150,293 |
| | 218,175 |
| | 293,581 |
| | 422,820 |
|
Asset impairment charges | 11,969 |
| | 1,504 |
| | 64,941 |
| | 3,279 |
|
Net gains on lease terminations | (885 | ) | | 0 |
| | (429 | ) | | 0 |
|
Earnings (loss) from operations | (14,349 | ) | | 45,987 |
| | (176,836 | ) | | 21,516 |
|
Other income (expense): | |
| | |
| | | | |
Interest expense | (5,941 | ) | | (4,951 | ) | | (11,403 | ) | | (6,210 | ) |
Interest income | 436 |
| | 313 |
| | 1,046 |
| | 674 |
|
Other income (expense), net | 5,548 |
| | (6,355 | ) | | (14,032 | ) | | (4,284 | ) |
| 43 |
| | (10,993 | ) | | (24,389 | ) | | (9,820 | ) |
| | | | | | | |
Earnings (loss) before income tax expense (benefit) | (14,306 | ) | | 34,994 |
| | (201,225 | ) | | 11,696 |
|
Income tax expense (benefit) | 6,386 |
| | 8,818 |
| | (19,995 | ) | | 6,101 |
|
Net earnings (loss) | (20,692 | ) | | 26,176 |
| | (181,230 | ) | | 5,595 |
|
Net earnings (loss) attributable to noncontrolling interests | (334 | ) | | 854 |
| | (3,206 | ) | | 1,647 |
|
Net earnings (loss) attributable to Guess?, Inc. | $ | (20,358 | ) | | $ | 25,322 |
| | $ | (178,024 | ) | | $ | 3,948 |
|
| | | | | | | |
Net earnings (loss) per common share attributable to common stockholders (Note 3): |
Basic | $ | (0.31 | ) | | $ | 0.36 |
| | $ | (2.72 | ) | | $ | 0.05 |
|
Diluted | $ | (0.31 | ) | | $ | 0.35 |
| | $ | (2.72 | ) | | $ | 0.05 |
|
| | | | | | | |
Weighted average common shares outstanding attributable to common stockholders (Note 3): |
Basic | 65,177 |
| | 70,508 |
| | 65,446 |
| | 75,216 |
|
Diluted | 65,177 |
| | 71,356 |
| | 65,446 |
| | 76,155 |
|
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 |
Product sales | $ | 606,691 | | | $ | 386,392 | | | $ | 1,105,168 | | | $ | 633,709 | |
Net royalties | 21,933 | | | 12,147 | | | 43,458 | | | 25,081 | |
Net revenue | 628,624 | | | 398,539 | | | 1,148,626 | | | 658,790 | |
Cost of product sales | 334,538 | | | 251,511 | | | 642,982 | | | 477,533 | |
Gross profit | 294,086 | | | 147,028 | | | 505,644 | | | 181,257 | |
Selling, general and administrative expenses | 205,617 | | | 150,293 | | | 392,301 | | | 293,581 | |
| | | | | | | |
| | | | | | | |
Asset impairment charges | 1,501 | | | 11,969 | | | 1,942 | | | 64,941 | |
Net gains on lease modifications | (420) | | | (885) | | | (2,565) | | | (429) | |
Earnings (loss) from operations | 87,388 | | | (14,349) | | | 113,966 | | | (176,836) | |
Other income (expense): | | | | | | | |
Interest expense | (6,009) | | | (5,941) | | | (11,935) | | | (11,403) | |
Interest income | 461 | | | 436 | | | 835 | | | 1,046 | |
Other income (expense), net | (1,001) | | | 5,548 | | | (3,702) | | | (14,032) | |
Total other income (expense) | (6,549) | | | 43 | | | (14,802) | | | (24,389) | |
| | | | | | | |
Earnings (loss) before income tax expense (benefit) | 80,839 | | | (14,306) | | | 99,164 | | | (201,225) | |
Income tax expense (benefit) | 17,692 | | | 6,386 | | | 23,147 | | | (19,995) | |
Net earnings (loss) | 63,147 | | | (20,692) | | | 76,017 | | | (181,230) | |
Net earnings (loss) attributable to noncontrolling interests | 2,085 | | | (334) | | | 2,949 | | | (3,206) | |
Net earnings (loss) attributable to Guess?, Inc. | $ | 61,062 | | | $ | (20,358) | | | $ | 73,068 | | | $ | (178,024) | |
| | | | | | | |
Net earnings (loss) per common share attributable to common stockholders: |
Basic | $ | 0.94 | | | $ | (0.31) | | | $ | 1.13 | | | $ | (2.72) | |
Diluted | $ | 0.91 | | | $ | (0.31) | | | $ | 1.10 | | | $ | (2.72) | |
| | | | | | | |
Weighted average common shares outstanding attributable to common stockholders: |
Basic | 64,336 | | | 65,177 | | | 64,185 | | | 65,446 | |
Diluted | 66,074 | | | 65,177 | | | 65,933 | | | 65,446 | |
| | | | | | | |
| | | | | | | |
See accompanying notes to condensed consolidated financial statements.
GUESS?, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Aug 1, 2020 | | Aug 3, 2019 | | Aug 1, 2020 | | Aug 3, 2019 |
Net earnings (loss) | $ | (20,692 | ) | | $ | 26,176 |
| | $ | (181,230 | ) | | $ | 5,595 |
|
Other comprehensive income (loss) (“OCI”): | |
| | |
| | | | |
Foreign currency translation adjustment | | | | | | | |
Gains (losses) arising during the period | 32,802 |
| | (5,293 | ) | | 14,303 |
| | (17,360 | ) |
Derivative financial instruments designated as cash flow hedges | |
| | |
| | | | |
Gains (losses) arising during the period | (7,897 | ) | | 2,286 |
| | (4,361 | ) | | 6,722 |
|
Less income tax effect | 885 |
| | (308 | ) | | 529 |
| | (880 | ) |
Reclassification to net earnings (loss) for gains realized | (2,462 | ) | | (1,801 | ) | | (4,450 | ) | | (2,077 | ) |
Less income tax effect | 264 |
| | 229 |
| | 483 |
| | 324 |
|
Defined benefit plans | |
| | |
| | | | |
Foreign currency and other adjustments | (236 | ) | | (167 | ) | | (236 | ) | | (60 | ) |
Less income tax effect | 25 |
| | 16 |
| | 24 |
| | 5 |
|
Net actuarial loss amortization | 97 |
| | 111 |
| | 193 |
| | 222 |
|
Prior service credit amortization | (16 | ) | | (9 | ) | | (32 | ) | | (19 | ) |
Less income tax effect | (10 | ) | | (12 | ) | | (19 | ) | | (23 | ) |
Total comprehensive income (loss) | 2,760 |
| | 21,228 |
| | (174,796 | ) | | (7,551 | ) |
Less comprehensive income (loss) attributable to noncontrolling interests: | |
| | |
| | | | |
Net earnings (loss) | (334 | ) | | 854 |
| | (3,206 | ) | | 1,647 |
|
Foreign currency translation adjustment | 1,759 |
| | (452 | ) | | (1,867 | ) | | (142 | ) |
Amounts attributable to noncontrolling interests | 1,425 |
| | 402 |
| | (5,073 | ) | | 1,505 |
|
Comprehensive income (loss) attributable to Guess?, Inc. | $ | 1,335 |
| | $ | 20,826 |
| | $ | (169,723 | ) | | $ | (9,056 | ) |
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 |
Net earnings (loss) | $ | 63,147 | | | $ | (20,692) | | | $ | 76,017 | | | $ | (181,230) | |
Other comprehensive income (loss) (“OCI”): | | | | | | | |
Foreign currency translation adjustment | | | | | | | |
Gains (losses) arising during the period | (5,251) | | | 32,802 | | | (7,467) | | | 14,303 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Derivative financial instruments designated as cash flow hedges | | | | | | | |
Gains (losses) arising during the period | 1,633 | | | (7,897) | | | 3,414 | | | (4,361) | |
Less income tax effect | (162) | | | 885 | | | (390) | | | 529 | |
Reclassification to net earnings (loss) for (gains) losses realized | 1,024 | | | (2,462) | | | 1,422 | | | (4,450) | |
Less income tax effect | (234) | | | 264 | | | (172) | | | 483 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Defined benefit plans | | | | | | | |
| | | | | | | |
Foreign currency and other adjustments | (44) | | | (236) | | | 85 | | | (236) | |
Less income tax effect | 5 | | | 25 | | | (8) | | | 24 | |
Net actuarial loss amortization | 106 | | | 97 | | | 211 | | | 193 | |
Prior service credit amortization | (17) | | | (16) | | | (34) | | | (32) | |
Less income tax effect | (12) | | | (10) | | | (23) | | | (19) | |
Total comprehensive income (loss) | 60,195 | | | 2,760 | | | 73,055 | | | (174,796) | |
Less comprehensive income (loss) attributable to noncontrolling interests: | | | | | | | |
Net earnings (loss) | 2,085 | | | (334) | | | 2,949 | | | (3,206) | |
Foreign currency translation adjustment | 74 | | | 1,759 | | | 291 | | | (1,867) | |
Amounts attributable to noncontrolling interests | 2,159 | | | 1,425 | | | 3,240 | | | (5,073) | |
Comprehensive income (loss) attributable to Guess?, Inc. | $ | 58,036 | | | $ | 1,335 | | | $ | 69,815 | | | $ | (169,723) | |
| | | | | | | |
See accompanying notes to condensed consolidated financial statements.
GUESS?, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) |
| | | | | | | |
| Six Months Ended |
| Aug 1, 2020 | | Aug 3, 2019 |
Cash flows from operating activities: | |
| | |
|
Net earnings (loss) | $ | (181,230 | ) | | $ | 5,595 |
|
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: | |
| | |
|
Depreciation and amortization | 32,250 |
| | 37,225 |
|
Amortization of debt discount | 5,197 |
| | 2,662 |
|
Amortization of debt issuance costs | 661 |
| | 276 |
|
Share-based compensation expense | 9,789 |
| | 9,454 |
|
Forward contract gains | 3,420 |
| | (34 | ) |
Net loss on impairment and disposition of property and equipment and long-term assets | 65,974 |
| | 3,753 |
|
Other items, net | 11,889 |
| | 5,606 |
|
Changes in operating assets and liabilities: | |
| | |
|
Accounts receivable | 94,373 |
| | 24,492 |
|
Inventories | (16,002 | ) | | (22,926 | ) |
Prepaid expenses and other assets | (20,550 | ) | | (1,596 | ) |
Operating lease assets and liabilities, net | 39,902 |
| | 1,340 |
|
Accounts payable and accrued expenses | (3,923 | ) | | (87,423 | ) |
Other long-term liabilities | (1,065 | ) | | (1,381 | ) |
Net cash provided by (used in) operating activities | 40,685 |
| | (22,957 | ) |
Cash flows from investing activities: | |
| | |
|
Purchases of property and equipment | (10,099 | ) | | (34,551 | ) |
Proceeds from sale of long-term assets | 336 |
| | 0 |
|
Net cash settlement of forward contracts | (273 | ) | | 162 |
|
Purchases of investments | (1,882 | ) | | 0 |
|
Other investing activities | (52 | ) | | 521 |
|
Net cash used in investing activities | (11,970 | ) | | (33,868 | ) |
Cash flows from financing activities: | |
| | |
|
Proceeds from borrowings | 274,594 |
| | 90,136 |
|
Repayments on borrowings and finance lease obligations | (218,267 | ) | | (63,285 | ) |
Proceeds from issuance of convertible senior notes | 0 |
| | 300,000 |
|
Proceeds from issuance of warrants | 0 |
| | 28,080 |
|
Purchase of convertible note hedges | 0 |
| | (60,990 | ) |
Convertible debt issuance costs | 0 |
| | (5,068 | ) |
Purchase of equity forward contracts | 0 |
| | (68,000 | ) |
Dividends paid | (958 | ) | | (26,901 | ) |
Issuance of common stock, net of tax withholdings on vesting of stock awards | (2,908 | ) | | 43 |
|
Purchase of treasury stock | (38,876 | ) | | (212,564 | ) |
Net cash provided by (used in) financing activities | 13,585 |
| | (18,549 | ) |
Effect of exchange rates on cash, cash equivalents and restricted cash | 1,070 |
| | (4,042 | ) |
Net change in cash, cash equivalents and restricted cash | 43,370 |
| | (79,416 | ) |
Cash, cash equivalents and restricted cash at the beginning of the year | 284,828 |
| | 210,995 |
|
Cash, cash equivalents and restricted cash at the end of the period | $ | 328,198 |
| | $ | 131,579 |
|
| | | |
Supplemental cash flow data: | |
| | |
|
Interest paid | $ | 5,277 |
| | $ | 1,535 |
|
Income taxes paid, net of refunds | $ | 2,967 |
| | $ | 4,201 |
|
| | | |
Non-cash investing and financing activity: | | | |
Assets acquired under finance lease obligations | $ | 276 |
| | $ | 3,055 |
|
Receivable and related adjustments from sale of retail locations | $ | (364 | ) | | $ | 5,088 |
|
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | | | | | | |
| Six Months Ended |
| Jul 31, 2021 | | Aug 1, 2020 |
Cash flows from operating activities: | | | |
Net earnings (loss) | $ | 76,017 | | | $ | (181,230) | |
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 27,918 | | | 32,250 | |
Amortization of debt discount | 5,562 | | | 5,197 | |
Amortization of debt issuance costs | 681 | | | 661 | |
Share-based compensation expense | 8,862 | | | 9,789 | |
Forward contract (gains) losses | (421) | | | 3,420 | |
| | | |
Net loss from impairment and disposition of long-term assets | 3,152 | | | 65,974 | |
Other items, net | 8,357 | | | 11,889 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 3,947 | | | 94,373 | |
Inventories | (39,230) | | | (16,002) | |
Prepaid expenses and other assets | (24,902) | | | (20,550) | |
Operating lease assets and liabilities, net | (10,323) | | | 39,902 | |
Accounts payable and accrued expenses | (16,494) | | | (3,923) | |
Other long-term liabilities | (150) | | | (1,065) | |
Net cash provided by operating activities | 42,976 | | | 40,685 | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (21,601) | | | (10,099) | |
Proceeds from sale of business and long-term assets | 1,648 | | | 336 | |
| | | |
| | | |
Net cash settlement of forward contracts | (755) | | | (273) | |
Purchases of investments | — | | | (1,882) | |
Other investing activities | (98) | | | (52) | |
Net cash used in investing activities | (20,806) | | | (11,970) | |
Cash flows from financing activities: | | | |
Proceeds from borrowings | 10,730 | | | 274,594 | |
Repayments on borrowings and finance lease obligations | (21,638) | | | (218,267) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Dividends paid | (14,818) | | | (958) | |
Noncontrolling interest capital distribution | (3,452) | | | — | |
| | | |
Issuance of common stock, net of tax withholdings on vesting of stock awards | 2,539 | | | (2,908) | |
Purchase of treasury stock | — | | | (38,876) | |
Net cash provided by (used in) financing activities | (26,639) | | | 13,585 | |
Effect of exchange rates on cash, cash equivalents and restricted cash | (5,732) | | | 1,070 | |
Net change in cash, cash equivalents and restricted cash | (10,201) | | | 43,370 | |
Cash, cash equivalents and restricted cash at the beginning of the year | 469,345 | | | 284,828 | |
Cash, cash equivalents and restricted cash at the end of the period | $ | 459,144 | | | $ | 328,198 | |
| | | |
Supplemental cash flow data: | | | |
Interest paid | $ | 5,051 | | | $ | 5,277 | |
Income taxes paid, net of refunds | $ | 21,382 | | | $ | 2,967 | |
| | | |
Non-cash investing and financing activity: | | | |
Assets acquired under finance lease obligations | $ | 5,751 | | | $ | 276 | |
Receivable and related adjustments from sale of retail locations | $ | — | | | $ | (364) | |
See accompanying notes to condensed consolidated financial statements.
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three and six months ended July 31, 2021 |
| Guess?, Inc. Stockholders’ Equity | | | | |
| Common Stock | | | | | | | | Treasury Stock | | | | |
| Shares | | Amount | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Shares | | Amount | | Nonredeemable Noncontrolling Interests | | Total |
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 | — | | | — | | | — | | | 12,006 | | | — | | | — | | | — | | | 864 | | | 12,870 | |
Other comprehensive income (loss), net of income tax of ($190) | — | | | — | | | — | | | — | | | (227) | | | — | | | — | | | 217 | | | (10) | |
Issuance of common stock under stock compensation plans | 689,653 | | | 7 | | | (6,417) | | | — | | | — | | | (690,492) | | | 8,123 | | | — | | | 1,713 | |
Issuance of stock under Employee Stock Purchase Plan | 12,798 | | | — | | | 81 | | | — | | | — | | | (12,798) | | | 151 | | | — | | | 232 | |
Share-based compensation | — | | | — | | | 4,056 | | | 4 | | | — | | | — | | | — | | | — | | | 4,060 | |
Dividends, net of forfeitures on non-participating securities | — | | | — | | | — | | | (7,252) | | | — | | | — | | | — | | | — | | | (7,252) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance at May 1, 2021 | 64,932,613 | | | $ | 649 | | | $ | 550,831 | | | $ | 1,039,581 | | | $ | (120,902) | | | 77,860,227 | | | $ | (915,964) | | | $ | 22,998 | | | $ | 577,193 | |
| | | | | | | | | | | | | | | | | |
Net earnings | — | | | — | | | — | | | 61,062 | | | — | | | — | | | — | | | 2,085 | | | 63,147 | |
Other comprehensive income (loss), net of income tax of ($403) | — | | | — | | | — | | | — | | | (3,026) | | | — | | | — | | | 74 | | | (2,952) | |
Issuance of common stock under stock compensation plans | 24,233 | | | 1 | | | 60 | | | — | | | — | | | (27,409) | | | 323 | | | — | | | 384 | |
Issuance of stock under Employee Stock Purchase Plan | 11,129 | | | — | | | 79 | | | — | | | — | | | (11,129) | | | 130 | | | — | | | 209 | |
Share-based compensation | — | | | — | | | 4,795 | | | 7 | | | — | | | — | | | — | | | — | | | 4,802 | |
Dividends, net of forfeitures on non-participating securities | — | | | — | | | — | | | (7,308) | | | — | | | — | | | — | | | — | | | (7,308) | |
| | | | | | | | | | | | | | | | | |
Noncontrolling interest capital distribution | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,452) | | | (3,452) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance at July 31, 2021 | 64,967,975 | | | $ | 650 | | | $ | 555,765 | | | $ | 1,093,342 | | | $ | (123,928) | | | 77,821,689 | | | $ | (915,511) | | | $ | 21,705 | | | $ | 632,023 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three and six months ended August 1, 2020 |
| Guess?, Inc. Stockholders’ Equity | | | | |
| Common Stock | | | | | | | | Treasury Stock | | | | |
| Shares | | Amount | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Shares | | Amount | | Nonredeemable Noncontrolling Interests | | Total |
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 |
|
Net loss | — |
| | — |
| | — |
| | (157,666 | ) | | — |
| | — |
| | — |
| | (2,872 | ) | | (160,538 | ) |
Other comprehensive loss, net of income tax of ($147) | — |
| | — |
| | — |
| | — |
| | (13,392 | ) | | — |
| | — |
| | (3,626 | ) | | (17,018 | ) |
Issuance of common stock under stock compensation plans including tax effect | 1,763,311 |
| | 18 |
| | (24,264 | ) | | — |
| | — |
| | (1,770,223 | ) | | 21,017 |
| | — |
| | (3,229 | ) |
Issuance of stock under Employee Stock Purchase Plan | 32,427 |
| | — |
| | (192 | ) | | — |
| | — |
| | (32,427 | ) | | 385 |
| | — |
| | 193 |
|
Share-based compensation | — |
| | — |
| | 5,771 |
| | 15 |
| | — |
| | — |
| | — |
| | — |
| | 5,786 |
|
Dividends, net of forfeitures on non-participating securities | — |
| | — |
| | — |
| | 248 |
| | — |
| | — |
| | — |
| | — |
| | 248 |
|
Balance at May 2, 2020 | 67,644,248 |
| | $ | 676 |
| | $ | 544,319 |
| | $ | 973,006 |
| | $ | (153,302 | ) | | 75,216,787 |
| | $ | (893,045 | ) | | $ | 15,135 |
| | $ | 486,789 |
|
Net loss | — |
| | — |
| | — |
| | (20,358 | ) | | — |
| | — |
| | — |
| | (334 | ) | | (20,692 | ) |
Other comprehensive income, net of income tax of $1,164 | — |
| | — |
| | — |
| | — |
| | 21,693 |
| | — |
| | — |
| | 1,759 |
| | 23,452 |
|
Issuance of common stock under stock compensation plans including tax effect | (54,926 | ) | | — |
| | 429 |
| | — |
| | — |
| | 37,730 |
| | (448 | ) | | — |
| | (19 | ) |
Issuance of stock under Employee Stock Purchase Plan | 25,427 |
| | — |
| | (154 | ) | | — |
| | — |
| | (25,427 | ) | | 301 |
| | — |
| | 147 |
|
Share-based compensation | — |
| | — |
| | 3,968 |
| | 35 |
| | — |
| | — |
| | — |
| | — |
| | 4,003 |
|
Dividends, net of forfeitures on non-participating securities | — |
| | — |
| | — |
| | 24 |
| | — |
| | — |
| | — |
| | — |
| | 24 |
|
Share repurchases | (4,000,000 | ) | | (40 | ) | | 40 |
| | — |
| | — |
| | 4,000,000 |
| | (38,876 | ) | | — |
| | (38,876 | ) |
Balance at August 1, 2020 | 63,614,749 |
| | $ | 636 |
| | $ | 548,602 |
| | $ | 952,707 |
| | $ | (131,609 | ) | | 79,229,090 |
| | $ | (932,068 | ) | | $ | 16,560 |
| | $ | 454,828 |
|
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three and six months ended August 1, 2020 |
| Guess?, Inc. Stockholders’ Equity | | | | |
| Common Stock | | | | | | | | Treasury Stock | | | | |
| Shares | | Amount | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Shares | | Amount | | Nonredeemable Noncontrolling Interests | | Total |
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 | |
| | | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | (157,666) | | | — | | | — | | | — | | | (2,872) | | | (160,538) | |
Other comprehensive loss, net of income tax of ($147) | — | | | — | | | — | | | — | | | (13,392) | | | — | | | — | | | (3,626) | | | (17,018) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock under stock compensation plans including tax effect | 1,763,311 | | | 18 | | | (24,264) | | | — | | | — | | | (1,770,223) | | | 21,017 | | | — | | | (3,229) | |
Issuance of stock under Employee Stock Purchase Plan | 32,427 | | | — | | | (192) | | | — | | | — | | | (32,427) | | | 385 | | | — | | | 193 | |
Share-based compensation | — | | | — | | | 5,771 | | | 15 | | | — | | | — | | | — | | | — | | | 5,786 | |
Dividends, net of forfeitures on non-participating securities | — | | | — | | | — | | | 248 | | | — | | | — | | | — | | | — | | | 248 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance at May 2, 2020 | 67,644,248 | | | $ | 676 | | | $ | 544,319 | | | $ | 973,006 | | | $ | (153,302) | | | 75,216,787 | | | $ | (893,045) | | | $ | 15,135 | | | $ | 486,789 | |
| | | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | (20,358) | | | — | | | — | | | — | | | (334) | | | (20,692) | |
Other comprehensive income, net of income tax of $1,164 | — | | | — | | | — | | | — | | | 21,693 | | | — | | | — | | | 1,759 | | | 23,452 | |
Issuance of common stock under stock compensation plans | (54,926) | | | — | | | 429 | | | — | | | — | | | 37,730 | | | (448) | | | — | | | (19) | |
Issuance of stock under Employee Stock Purchase Plan | 25,427 | | | — | | | (154) | | | — | | | — | | | (25,427) | | | 301 | | | — | | | 147 | |
Share-based compensation | — | | | — | | | 3,968 | | | 35 | | | — | | | — | | | — | | | — | | | 4,003 | |
Dividends, net of forfeitures on non-participating securities | — | | | — | | | — | | | 24 | | | — | | | — | | | — | | | — | | | 24 | |
Share repurchases | (4,000,000) | | | (40) | | | 40 | | | — | | | — | | | 4,000,000 | | | (38,876) | | | — | | | (38,876) | |
| | | | | | | | | | | | | | | | | |
Balance at August 1, 2020 | 63,614,749 | | | $ | 636 | | | $ | 548,602 | | | $ | 952,707 | | | $ | (131,609) | | | 79,229,090 | | | $ | (932,068) | | | $ | 16,560 | | | $ | 454,828 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three and six months ended August 3, 2019 |
| Guess?, Inc. Stockholders’ Equity | | | | |
| 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 | 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 | — |
| | — |
| | — |
| | (1,684 | ) | | 1,981 |
| | — |
| | — |
| | — |
| | 297 |
|
Net earnings (loss) | — |
| | — |
| | — |
| | (21,374 | ) | | — |
| | — |
| | — |
| | 793 |
| | (20,581 | ) |
Other comprehensive income (loss), net of income tax of ($499) | — |
| | — |
| | — |
| | — |
| | (8,508 | ) | | — |
| | — |
| | 310 |
| | (8,198 | ) |
Issuance of common stock under stock compensation plans including tax effect | 545,881 |
| | 5 |
| | (3,042 | ) | | — |
| | — |
| | (211,221 | ) | | 2,225 |
| | — |
| | (812 | ) |
Issuance of stock under Employee Stock Purchase Plan | 11,377 |
| | 1 |
| | 69 |
| | — |
| | — |
| | (11,377 | ) | | 120 |
| | — |
| | 190 |
|
Share-based compensation | — |
| | — |
| | 4,440 |
| | 28 |
| | — |
| | — |
| | — |
| | — |
| | 4,468 |
|
Dividends, net of forfeitures on non-participating securities | — |
| | — |
| | — |
| | (18,331 | ) | | — |
| | — |
| | — |
| | — |
| | (18,331 | ) |
Share repurchases | (10,264,052 | ) | | (103 | ) | | 103 |
| | — |
| | — |
| | 10,264,052 |
| | (201,564 | ) | | — |
| | (201,564 | ) |
Equity component value of convertible note issuance, net | — |
| | — |
| | 42,324 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 42,324 |
|
Sale of common stock warrant | — |
| | — |
| | 28,080 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 28,080 |
|
Purchase of convertible note hedge | — |
| | — |
| | (46,440 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (46,440 | ) |
Equity forward contract issuance | — |
| | — |
| | (68,000 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (68,000 | ) |
Balance at May 4, 2019 | 71,672,866 |
| | $ | 717 |
| | $ | 480,865 |
| | $ | 1,036,386 |
| | $ | (132,706 | ) | | 71,369,094 |
| | $ | (837,705 | ) | | $ | 17,521 |
| | $ | 565,078 |
|
Net earnings | — |
| | — |
| | — |
| | 25,322 |
| | — |
| | — |
| | — |
| | 854 |
| | 26,176 |
|
Other comprehensive loss, net of income tax of ($75) | — |
| | — |
| | — |
| | — |
| | (4,496 | ) | | — |
| | — |
| | (452 | ) | | (4,948 | ) |
Issuance of common stock under stock compensation plans including tax effect | 64,080 |
| | — |
| | (852 | ) | | — |
| | — |
| | (106,039 | ) | | 1,249 |
| | — |
| | 397 |
|
Issuance of stock under Employee Stock Purchase Plan | 19,538 |
| | — |
| | 38 |
| | — |
| | — |
| | (19,538 | ) | | 230 |
| | — |
| | 268 |
|
Share-based compensation | — |
| | — |
| | 4,928 |
| | 58 |
| | — |
| | — |
| | — |
| | — |
| | 4,986 |
|
Dividends, net of forfeitures on non-participating securities | — |
| | — |
| | — |
| | (8,162 | ) | | — |
| | — |
| | — |
| | — |
| | (8,162 | ) |
Share repurchases | (749,252 | ) | | (7 | ) | | 7 |
| | — |
| | — |
| | 749,252 |
| | (11,000 | ) | | — |
| | (11,000 | ) |
Balance at August 3, 2019 | 71,007,232 |
| | $ | 710 |
| | $ | 484,986 |
| | $ | 1,053,604 |
| | $ | (137,202 | ) | | 71,992,769 |
| | $ | (847,226 | ) | | $ | 17,923 |
| | $ | 572,795 |
|
See accompanying notes to condensed consolidated financial statements.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2020July 31, 2021
(unaudited)
| |
(1) | Basis of Presentation and New Accounting Guidance |
(1)Basis of Presentation
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.
Basis of PresentationInterim Financial Statements
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheets as of August 1, 2020July 31, 2021 and February 1, 2020,January 30, 2021, the condensed consolidated statements of income (loss), comprehensive income (loss), cash flows and stockholders’ equity for the three and six months ended July 31, 2021 and August 1, 2020 and August 3, 2019 and the condensed consolidated statements of cash flows for the six months ended August 1, 2020 and August 3, 2019.2020. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations and cash flows for the three and six months ended August 1, 2020July 31, 2021 are not necessarily indicative of the results of operations to be expected for the full fiscal year.
These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended February 1, 2020.January 30, 2021.
Fiscal Periods
The three and six months ended August 1, 2020July 31, 2021 had the same number of days as the three and six months ended August 3, 2019.1, 2020. All references herein to “fiscal 2021,2022,” “fiscal 2020”2021” and “fiscal 2019”2020” represent the results of the 52-week fiscal yearyears ending January 29, 2022, January 30, 2021 and the 52-week fiscal years ended February 1, 2020, respectively.
COVID-19 Business Update
The coronavirus (“COVID-19”) pandemic is continuing to impact the Company’s businesses. During the second quarter of fiscal 2022, the Company experienced lower net revenue compared to the second quarter of fiscal 2020 as it remained challenged by lower demand, capacity restrictions and February 2, 2019, respectively.temporary store closures. In light of the current environment, the Company continues to strategically manage expenses in order to protect profitability.
During the second quarter of fiscal 2022, the Company gradually reopened its stores that were closed at the end of the first quarter of fiscal 2022 due to COVID-19 restrictions. As of July 31, 2021, almost all of our stores were open.
Summary of Significant Accounting Policies
The accounting policies of the Company are set forth in further detail in Note 1 to the Company's Consolidated Financial Statements contained in the Company’s fiscal 2021 Annual Report on Form 10-K. The Company includes herein certain updates to those policies.
Reclassifications
The Company has made certain reclassifications to prior period amounts to conform to the current period presentation within the accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements.
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, income taxes, 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”)The COVID-19 pandemic has materially impacted the Company’s results during the three and six months ended July 31, 2021 and August 1, 2020. The Company’s operations could continue to be impacted in ways we arethe Company is not able to predict today due to the developingevolving 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 has had and is continuing to have a material impact on the Company’s financial performance. The pandemic is ongoing and dynamic in nature and, to date, the Company has experienced temporary closures in key regions globally. During the second quarter of fiscal 2021, the Company gradually reopened most of its global fleet of brick-and-mortar stores resulting in stores being closed for approximately 30% and 35% of the total days during the three and six months ended August 1, 2020, respectively. As of August 1, 2020, approximately 95% of the Company’s stores were open, with the majority of closed stores located primarily within interior malls in California. The Company will continue to reopen stores (and/or close again, if appropriate), as state and local guidelines and conditions permit or require, taking an informed, measured approach based on a number of factors. The Company’s e-commerce sites have remained open in all regions. In addition, retail stores that are open have and continue to experience significant reductions in traffic and revenue. Many of the Company’s wholesale and licensing partners have also substantially reduced their operations. The Company has been bringing back furloughed store associates and support staff as stores reopen. The extent and duration of the global pandemic remains uncertain and may continue to impact consumer purchasing activity into the foreseeable future.
During the first half of fiscal 2021, in addition to the negative impact from lower net revenue, the Company’s operating results reflected asset impairment charges as well as additional inventory valuation reserves and higher allowances for markdowns and doubtful accounts due to the ongoing effects of the COVID-19 pandemic. These charges were partially offset by lower selling, general and administrative (“SG&A”) expenses driven primarily by expense savings, both one-time, such as furloughs and temporary salary reductions, and permanent, such as headcount reductions and lower discretionary spending. In addition, the Company benefited from various government assistance programs related primarily to the recovery of employee payroll costs as well as certain favorable tax treatments.
During the first half of fiscal 2021, the Company implemented a number of measures to help mitigate the operating and financial impact of the pandemic, including: (i) furloughing its U.S. and Canada store associates and significant portions of its U.S. and Canada corporate and distribution center associates and permanently reducing U.S. corporate headcount; (ii) implementing temporary tiered salary reductions for management level corporate employees, including its executive officers; (iii) deferring annual merit increases; (iv) executing substantial reductions in expenses, store occupancy costs, capital expenditures and overall costs, including through reduced inventory purchases; (v) working globally with country management teams to maximize the Company’s participation in all eligible government or other initiatives available to businesses or employees impacted by the COVID-19 pandemic; (vi) drawing down on certain credit facilities and entering into certain term loans to ensure financial flexibility and maintain maximum liquidity; (vii) engaging with landlords to negotiate rent deferrals or other rent concessions; (viii) working with vendors to extend payment terms; and (ix) postponing its decision related to the payment of its quarterly cash dividend.
During the second quarter of fiscal 2021, as the situation began to stabilize, the Company repaid a significant portion of its previously drawn down credit facilities, continued to bring back furloughed employees, eliminated the temporary tiered salary reductions and invested in share repurchases to return value to its shareholders. Subsequent to the second quarter of fiscal 2021, the Company also announced that it would resume paying its quarterly cash dividend 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.
In response to the COVID-19 pandemic, governments in various jurisdictions have implemented relief programs to provide assistance in the form of wage subsidies and tax related payment deferrals (related to payroll, income, sales and other taxes). The Company is leveraging these relief initiatives where able to help mitigate expenses and provide additional liquidity. An example of such an economic relief program is the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was enacted by the U.S. government in March 2020. The provisions of the CARES Act include the deferral of the employer portion of social security taxes, creation
of refundable employee retention tax credits, modification of net operating loss carryback periods, relaxation of the net interest deduction limitations and technical amendment for qualified improvement property deduction.
In light of store closures and reduced traffic in stores, the Company has taken certain actions with respect to certain of its existing leases, including engaging with landlords to discuss rent deferrals as well as other rent concessions. Since April 2020, the Company has 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 is engaging in discussions with the 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 condensed 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 less than 12 months. For any rent concessions which reduce the lease payments for a period of 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.
Revenue Recognition
The Company recognizes the majority of its revenue from its direct-to-consumer (brick-and-mortar retail stores 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.
The Company also recognizes royalty revenue from its trademark license agreements. 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 amount of revenue that is recognized from the licensing arrangements is based on sales-based royalty and advertising fund contributions as well as specific fixed payments, where applicable. The Company’s trademark license agreements customarily provide for a multi-year initial term ranging from three to ten15 years and may contain options to renew prior to expiration for an additional multi-year period. 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 August 1, 2020,July 31, 2021, the Company had $6.4$5.7 million and $15.7$14.8 million of deferred royalties related to these upfront payments included in accrued expenses and other current liabilities and other long-term liabilities, respectively. This compares to $6.7$6.6 million and $18.7$17.1 million of deferred royalties related to these upfront payments included in accrued expenses and other current liabilities and other long-term liabilities, respectively, at February 1, 2020.January 30, 2021. During the three and six months ended July 31, 2021, the Company recognized $3.6 million and $7.1 million in net royalties related to the amortization of the deferred royalties, respectively. During the three and six months ended August 1, 2020, the Company recognized $3.1 million and $6.7 million in net royalties related to the amortization of the deferred royalties, respectively. During the three and six months ended August 3, 2019, the Company recognized $3.1 million and $6.1 million in net royalties related to the amortization of the deferred royalties, respectively.
Refer to Note 8 for further information on disaggregation of revenue by segment and country.
Allowance for Doubtful Accounts
During the first quarter of 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.
In the normal course of business, the Company grants 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 allowances for doubtful accounts for estimated losses that may result from the inability of its wholesale customers and licensing partners 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 and future forecasted economic conditions and whether the Company has obtained credit insurance or other guarantees. Management performs regular evaluations concerning the ability of its customers and records a provision for doubtful accounts based on these evaluations.
As of August 1, 2020,July 31, 2021, approximately 58%55% of the Company’s total net trade accounts receivable and 68%70% 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. Management evaluates the creditworthiness of the counterparties to the credit insurance, bank guarantees, and letters of credit and records a provision for the risk of loss on these instruments based on these evaluations as considered necessary.
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 5 for further information on the Company’s allowance for doubtful accounts.
Net Gains on Lease Terminations
During the three and six months ended August 1, 2020, the Company recorded net gains on lease terminations of $0.9 million and $0.4 million, respectively, related primarily to the early termination of certain lease agreements.
Other Assets
During fiscal 2019, the Company invested $8.3 million in a privately-held apparel company. During the second quarter of fiscal 2021, the Company invested an additional $1.9 million. The Company’s ownership in this company (a 30% minority interest) is accounted for under the equity method of accounting. The Company recognized its proportionate share of net losses of this company of $2.0 million and $4.1 million in other income (expense) in its condensed consolidated statements of income (loss) during the three and six months ended August 1, 2020, respectively. During the three and six months ended August 3, 2019, the Company recognized its proportionate share of net losses of this company of $2.9 million in other income (expense) in its condensed consolidated statements of income (loss).
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 the second quarter of fiscal 2021, the Company recorded an adjustment of AUD$0.5 million (US$0.4 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. As of August 1, 2020, the Company included AUD$2.0 million (US$1.4 million) and AUD$2.6 million (US$1.9 million) in accounts receivable, net and other assets, respectively, in its condensed consolidated balance sheet based on the timing of the payments. This compares to AUD$1.8 million (US$1.2 million) and AUD$3.3 million (US$2.2 million) included in accounts receivable, net and other assets, respectively, as of February 1, 2020.
New Accounting Guidance
Recently Adopted Accounting Guidance
In June 2016, the FASB issued 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 measurement of expected credit losses is based on relevant information about past events, current conditions and reasonable and supportable forecasts impacting the collectibility of the reported amounts. This guidance was adopted as of February 2, 2020 on a modified retrospective basis and did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In August 2018, the FASB issued authoritative guidance to modify the disclosure requirements on fair value measurements. This guidance was adopted as of February 2, 2020 on a prospective basis and did not have a material impact on the Company’s related disclosures.
In August 2018, the FASB issued authoritative guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted this guidance as of February 2, 2020 on a prospective basis. Prior to the adoption of this guidance, the Company capitalized implementation costs related to a hosting arrangement that is a service contract to property and equipment, net in the Company’s consolidated balance sheets and included such expenditures within the investing section of the Company’s consolidated statements of cash flows. These assets were amortized over their estimated useful life with the related amortization included in depreciation and amortization in either cost of product sales or SG&A expenses in the Company’s consolidated statements of income (loss) depending on the nature of how the assets were used. Subsequent to the adoption of this guidance, these costs are included within other current assets or other assets in the Company’s consolidated balance sheets depending on the short or long-term nature of the underlying hosting agreement with such expenditures included in the operating section of the Company’s consolidated statements of cash flows. These assets are now amortized over the shorter of the estimated useful life or the term of the underlying hosting agreement, including any probable renewal periods, with the related amortization included in cost of product sales or SG&A expenses in the Company’s consolidated statements of income (loss), consistent with the presentation of the expense related to the underlying hosting arrangement. The adoption of this guidance, including the different classification requirements for the implementation costs, did not have a material impact on the Company’s consolidated financial statements or the related disclosures.
In December 2019, the FASB issued authoritative guidance that simplifies the accounting for income taxes by eliminating certain exceptions to general principles related to intraperiod 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 new guidance also simplifies the accounting for income taxes related to franchise taxes that are partially based on income, the step up in the tax basis of goodwill, allocation of current and deferred tax expense for certain legal entities and enacted changes in tax laws or rates during interim periods, among other improvements. This guidance was adopted during the second quarter of fiscal 2021 on a prospective basis and did not have a material impact on the Company’s consolidated financial statements or related disclosures.
Recently Issued Accounting Guidance
In August 2018, the FASB issued authoritative guidance to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance is effective for fiscal years beginning after December 15, 2020, which will be the Company’s first quarter of fiscal 2022, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its financial statement disclosures.
In March 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued authoritative guidance to provide temporary optional expedients and exceptions related to contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR.the Secured Financial Oversight Rate (“SOFR”). This guidance may be adopted as of March 12, 2020 through December 31, 2022. This temporary relief cannot be appliedup to contract modifications after December 31, 2022. The Company is currently evaluating its election options and the impact on its consolidated financial statements and related disclosures.
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 which will enable 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 that are required for equity contracts to qualify for the derivative scope exception. The new guidance also requires the “if -converted” method to 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. In addition, expanded disclosures are required on the terms and features of convertible instruments. This guidance is effective for fiscal years beginning after December 31, 2021, which will be the Company’s first quarter of fiscal 2023, on either a full or modified retrospective basis. Early adoption is permitted for fiscal years beginning after December 31, 2020, which will bewas the Company’s first quarter of fiscal 2022. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements and related disclosures.
In May 2021, the FASB issued authoritative guidance to clarify and reduce diversity in accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modifications or exchanges based on the substance of the transactions. This guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, which will be the Company’s first quarter of fiscal 2023. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements and related disclosures. (2) 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 lease payments based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from 3% to 23%28%, when specific sales volumes are exceeded. The Company’s retail concession leases also provide for lease payments primarily based upon a percentage of annual sales volume, which averages approximately 35%34%.
In addition to the amounts as disclosed below, the Company has estimated additional operating lease commitments of approximately $24.4$15.1 million for leases where the Company has not yet taken possession of the underlying asset as of August 1, 2020.July 31, 2021. As such, the related operating lease ROU assets and operating lease liabilities have not been recognized in the Company’s condensed consolidated balance sheet as of August 1, 2020.July 31, 2021.
As of August 1, 2020 and February 1, 2020, theThe components of leases are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Jul 31, 2021 | | Jan 30, 2021 | | |
Assets | Balance Sheet Location | | | | | |
Operating | Operating lease right-of-use assets | $ | 727,636 | | | $ | 764,804 | | | |
Finance | Property and equipment, net | 23,172 | | | 20,595 | | | |
Total lease assets | $ | 750,808 | | | $ | 785,399 | | | |
| | | | | | |
Liabilities | Balance Sheet Location | | | | | |
Current: | | | | | | |
Operating | Current portion of operating lease liabilities | $ | 214,392 | | | $ | 222,800 | | | |
Finance | Current portion of borrowings and finance lease obligations | 6,153 | | | 4,698 | | | |
Noncurrent: | | | | | | |
Operating | Long-term operating lease liabilities | 623,040 | | | 662,657 | | | |
Finance | Long-term debt and finance lease obligations | 18,641 | | | 17,365 | | | |
Total lease liabilities | $ | 862,226 | | | $ | 907,520 | | | |
|
| | | | | | | | |
| Balance Sheet Location | Aug 1, 2020 | | Feb 1, 2020 |
Assets | | | | |
Operating | Operating lease right-of-use assets | $ | 766,853 |
| | $ | 851,990 |
|
Finance | Property and equipment, net | 15,451 |
| | 15,972 |
|
Total lease assets | $ | 782,304 |
| | $ | 867,962 |
|
| | | | |
Liabilities | | | | |
Current: | | | | |
Operating | Current portion of operating lease liabilities | $ | 235,749 |
| | $ | 192,066 |
|
Finance | Current portion of borrowings and finance lease obligations | 2,524 |
| | 2,273 |
|
Noncurrent: | | | | |
Operating | Long-term operating lease liabilities | 659,118 |
| | 714,079 |
|
Finance | Long-term debt and finance lease obligations | 13,729 |
| | 14,262 |
|
Total lease liabilities | $ | 911,120 |
| | $ | 922,680 |
|
As of August 1, 2020 and August 3, 2019, theThe components of lease costs are as follows (in thousands):
| | | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| Income Statement Location | Aug 1, 2020 | | Aug 3, 2019 | | Aug 1, 2020 | | Aug 3, 2019 | | Income Statement Location | Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 |
Operating lease costs | Cost of product sales | $ | 50,005 |
| | $ | 58,749 |
| | $ | 105,374 |
| | $ | 117,565 |
| Operating lease costs | Cost of product sales | $ | 45,776 | | | $ | 50,005 | | | $ | 92,460 | | | $ | 105,374 | |
Operating lease costs | Selling, general and administrative expenses | 5,355 |
| | 5,720 |
| | 10,531 |
| | 10,984 |
| Operating lease costs | Selling, general and administrative expenses | 6,189 | | | 5,355 | | | 12,546 | | | 10,531 | |
Operating lease costs1, 2 | | Operating lease costs1, 2 | Net gains on lease modifications | (420) | | | (885) | | | (2,565) | | | (429) | |
Finance lease costs | | | | | | | | | Finance lease costs | |
Amortization of leased assets1, 2 | Cost of product sales | 20 |
| | 44 |
| | 32 |
| | 87 |
| |
Amortization of leased assets1, 2 | Selling, general and administrative expenses | 474 |
| | 637 |
| | 1,338 |
| | 1,180 |
| |
Amortization of leased assets3 | | Amortization of leased assets3 | Cost of product sales | 17 | | | 20 | | | 28 | | | 32 | |
Amortization of leased assets3 | | Amortization of leased assets3 | Selling, general and administrative expenses | 1,406 | | | 474 | | | 2,767 | | | 1,338 | |
Interest on lease liabilities | Interest expense | 208 |
| | 286 |
| | 490 |
| | 573 |
| Interest on lease liabilities | Interest expense | 263 | | | 208 | | | 629 | | | 490 | |
Variable lease costs3 | Cost of product sales | 13,209 |
| | 25,083 |
| | 27,557 |
| | 49,908 |
| |
Variable lease costs3 | Selling, general and administrative expenses | 638 |
| | 628 |
| | 1,217 |
| | 1,455 |
| |
Variable lease costs4 | | Variable lease costs4 | Cost of product sales | 16,640 | | | 13,209 | | | 32,379 | | | 27,557 | |
Variable lease costs4 | | Variable lease costs4 | Selling, general and administrative expenses | 445 | | | 638 | | | 1,019 | | | 1,217 | |
Short-term lease costs | Cost of product sales | 181 |
| | 0 |
| | 420 |
| | 0 |
| Short-term lease costs | Cost of product sales | 126 | | | 181 | | | 231 | | | 420 | |
Short-term lease costs | Selling, general and administrative expenses | 170 |
| | 183 |
| | 1,959 |
| | 395 |
| Short-term lease costs | Selling, general and administrative expenses | 1,123 | | | 170 | | | 2,294 | | | 1,959 | |
Total lease costs | $ | 70,260 |
| | $ | 91,330 |
| | $ | 148,918 |
|
| $ | 182,147 |
| |
Total lease costs1 | | Total lease costs1 | $ | 71,565 | | | $ | 69,375 | | | $ | 141,788 | | | $ | 148,489 | |
Notes:
| |
1 1The Company has made certain reclassifications to prior period amounts to conform to the current period presentation. 2During the three and six months ended July 31, 2021 and August 1, 2020, net gains on lease modifications related primarily to the early termination of lease agreements for certain of the Company’s retail locations. Operating lease costs for these retail locations prior to the early termination were included in cost of product sales. 3Amortization of leased assets related to finance 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 condensed consolidated statements of income (loss). 4During the three and six months ended July 31, 2021, variable lease costs included certain rent concessions of approximately $5.8 million and $11.9 million, respectively, received by the Company, primarily in Europe, related to the COVID-19 pandemic. During the three and six months ended August 1, 2020, variable lease costs included certain rent concessions of approximately $7.7 million and $10.5 million, respectively, received by the Company, primarily in Europe, related to the COVID-19 pandemic.
| The Company has made certain reclassifications to prior period amounts to conform to the current period presentation. |
| |
2
| Amortization of leased assets related to finance 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 condensed consolidated statements of income (loss). |
| |
3
| During the three and six months ended August 1, 2020, variable lease costs included certain rent concessions received by the Company, primarily in Europe, related to the COVID-19 pandemic of approximately $7.7 million and $10.5 million, respectively. Refer to Note 1 for further information. |
Maturities of the Company’s operating and finance lease liabilities as of August 1, 2020July 31, 2021 are as follows (in thousands):
| | | | | | | | | | Operating Leases | | |
Maturity of Lease Liabilities | Operating Leases | | Finance Leases | | Total | Maturity of Lease Liabilities | Non-Related Parties | | Related Parties | | Finance Leases | | Total | |
20211 | $ | 155,961 |
| | $ | 1,618 |
| | $ | 157,579 |
| |
2022 | 207,825 |
| | 3,904 |
| | 211,729 |
| |
20221 | | 20221 | $ | 133,685 | | | $ | 4,450 | | | $ | 3,826 | | | $ | 141,961 | | |
2023 | 172,592 |
| | 3,483 |
| | 176,075 |
| 2023 | 185,793 | | | 7,716 | | | 7,131 | | | 200,640 | | |
2024 | 144,021 |
| | 3,260 |
| | 147,281 |
| 2024 | 151,520 | | | 7,939 | | | 7,121 | | | 166,580 | | |
2025 | 99,851 |
| | 2,446 |
| | 102,297 |
| 2025 | 108,827 | | | 7,309 | | | 4,298 | | | 120,434 | | |
After 2025 | 201,665 |
| | 5,229 |
| | 206,894 |
| |
2026 | | 2026 | 78,057 | | | 6,916 | | | 2,996 | | | 87,969 | | |
After 2026 | | After 2026 | 189,134 | | | 36,362 | | | 3,109 | | | 228,605 | | |
Total lease payments | 981,915 |
| | 19,940 |
| | 1,001,855 |
| Total lease payments | 847,016 | | | 70,692 | | | 28,481 | | | 946,189 | | |
Less: Interest | 87,048 |
| | 3,687 |
| | 90,735 |
| Less: Interest | 68,825 | | | 11,451 | | | 3,687 | | | 83,963 | | |
Present value of lease liabilities | $ | 894,867 |
| | $ | 16,253 |
| | $ | 911,120 |
| Present value of lease liabilities | $ | 778,191 | | | $ | 59,241 | | | $ | 24,794 | | | $ | 862,226 | | |
Notes:
| |
11Represents the maturity of lease liabilities for the remainder of fiscal 2022 and also includes rent payments that have been deferred due to the COVID-19 pandemic. This amount does not include payments made during the six months ended July 31, 2021. | Represents the maturity of lease liabilities for the remainder of fiscal 2021 and also includes rent payments that have been deferred due to the COVID-19 pandemic. This amount does not include payments made during the six months ended August 1, 2020. |
Other supplemental information is as follows (dollars in thousands):
|
| | | | | | | | | | |
Lease Term and Discount Rate | Aug 1, 2020Jul 31, 2021 | | | | | | |
Weighted-average remaining lease term (years) | | | | | | | |
Operating leases | 5.7 years6.0 Years | | | | | | |
Finance leases | 5.9 years4.4 Years | | | | | | |
Weighted-average discount rate | | | | | | | |
Operating leases | 3.7%3.4% | | | | | | |
Finance leases | 7.0%6.5% | | | | | | |
|
| | | | | | | |
| Six Months Ended |
Supplemental Cash Flow Information | Aug 1, 2020 | | Aug 3, 2019 |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from operating leases | $ | 70,890 |
| | $ | 124,687 |
|
New operating ROU assets obtained in exchange for lease liabilities | $ | 19,566 |
| | $ | 99,951 |
|
| | | | | | | | | | | |
| Six Months Ended |
Supplemental Cash Flow Information | Jul 31, 2021 | | Aug 1, 2020 |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from operating leases | $ | 115,264 | | | $ | 70,890 | |
| | | |
| | | |
New operating ROU assets obtained in exchange for lease liabilities | $ | 63,238 | | | $ | 19,566 | |
Impairment
During the three and six months ended July 31, 2021, there were minimal ROU asset impairment charges recorded primarily in Europe. During the three and six months ended August 1, 2020, the Company recorded ROU asset impairment charges of $8.2 million and $36.5 million, respectively, related to ROU assets at certain retail locations in North America and Europe. The asset impairment charges were determined based on the excess of carrying value over the fair value of the ROU assets. The Company uses estimates of market participant rents to calculate fair value of the ROU assets. There were 0 asset impairment charges recorded related to the Company’s ROU assets during the three and six months ended August 3, 2019. Refer to Note 15 for more information on the Company’s impairment testing.
| |
(3) | (3)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, and the dilutive impact of the Company’s convertible senior notes and related warrants, as applicable.Share
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. See Note 10 for more information regarding the Company’s convertible senior notes.
In periods when there is a net loss, the potentially dilutive impact
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 was the end of the related contingency period, and the results would be dilutive under the treasury stock method.
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):
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| Aug 1, 2020 | | Aug 3, 2019 | | Aug 1, 2020 | | Aug 3, 2019 | | Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 |
Net earnings (loss) attributable to Guess?, Inc. | $ | (20,358 | ) | | $ | 25,322 |
| | $ | (178,024 | ) | | $ | 3,948 |
| Net earnings (loss) attributable to Guess?, Inc. | $ | 61,062 | | | $ | (20,358) | | | $ | 73,068 | | | $ | (178,024) | |
Less net earnings attributable to nonvested restricted stockholders | 0 |
| | 233 |
| | 0 |
| | 235 |
| Less net earnings attributable to nonvested restricted stockholders | 699 | | | — | | | 775 | | | — | |
Net (earnings) loss attributable to common stockholders | $ | (20,358 | ) | | $ | 25,089 |
| | $ | (178,024 | ) | | $ | 3,713 |
| |
Net earnings (loss) attributable to common stockholders | | Net earnings (loss) attributable to common stockholders | $ | 60,363 | | | $ | (20,358) | | | $ | 72,293 | | | $ | (178,024) | |
| | | | | | | | | | | | | | | |
Weighted average common shares used in basic computations | 65,177 |
| | 70,508 |
| | 65,446 |
| | 75,216 |
| Weighted average common shares used in basic computations | 64,336 | | | 65,177 | | | 64,185 | | | 65,446 | |
Effect of dilutive securities: | |
| | |
| | |
| | |
| |
Stock options and restricted stock units1 | 0 |
| | 848 |
| | 0 |
| | 939 |
| |
| Effect of dilutive securities: Stock options, convertible senior notes and restricted stock units1 | | Effect of dilutive securities: Stock options, convertible senior notes and restricted stock units1 | 1,738 | | | — | | | 1,748 | | | — | |
Weighted average common shares used in diluted computations | 65,177 |
| | 71,356 |
| | 65,446 |
| | 76,155 |
| Weighted average common shares used in diluted computations | 66,074 | | | 65,177 | | | 65,933 | | | 65,446 | |
| | | | | | | | | | | | | | | |
Net earnings (loss) per common share attributable to common stockholders: | Net earnings (loss) per common share attributable to common stockholders: | Net earnings (loss) per common share attributable to common stockholders: |
Basic | $ | (0.31 | ) | | $ | 0.36 |
| | $ | (2.72 | ) | | $ | 0.05 |
| Basic | $ | 0.94 | | | $ | (0.31) | | | $ | 1.13 | | | $ | (2.72) | |
Diluted | $ | (0.31 | ) | | $ | 0.35 |
| | $ | (2.72 | ) | | $ | 0.05 |
| Diluted | $ | 0.91 | | | $ | (0.31) | | | $ | 1.10 | | | $ | (2.72) | |
______________________________________________________________________Notes:
| |
11 | For the three and six months ended August 1, 2020, there were 262,086 and 382,222, respectively, of 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 the three months ended August 1, 2020, there were 262,086 and 382,222, respectively, of 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.
During the three months ended July 31, 2021 and August 3, 2019,1, 2020, equity awards granted for 4,121,433272,705 and 3,258,910,4,121,433, respectively, of the Company’s common shares and for the six months ended July 31, 2021 and August 1, 2020, and August 3, 2019, equity awards granted for 3,890,881326,474 and 2,899,760,3,890,881, 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 the three and six months ended August 1, 2020, the Company also excluded 525,875July 31, 2021, there were 695,566 nonvested stock units which are 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 because theseas the respective conditions were not achieved as of August 1, 2020.July 31, 2021. For the three and six months ended August 3, 2019,1, 2020, the Company excluded 1,228,017525,875 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 August 3, 2019.1, 2020.
The conversion spread on the Company’s convertible senior notes will havehas 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 conversion price of $25.78 per share of common stock. For the three and six months ended August 1, 2020 and August 3, 2019, the convertible senior notes have been excluded from the computation
Warrants to initially 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 July 31, 2021 and August 1, 2020. These warrants were excluded from the computation of diluted earnings per share since the warrants’ adjusted strike price was greater than the average market price of the Company’s common stock during the three and six
months ended July 31, 2021 and August 1, 2020 and August 3, 2019. See Note 10 for more information regarding the Company’s convertible senior notes.2020.
Share Repurchase Program
On June 26, 2012,During the Company’s Board of Directors authorized a program to repurchase, from time-to-timethree 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 issix months ended July 31, 2021, there were no minimum or maximum number of shares to be repurchased under the program, which may be discontinued at any time, without prior notice.Company’s Share Repurchase Program. There were 4,000,000 shares repurchased at an aggregate cost of $38.8 million under the program during the three and six months ended August 1, 2020. During the six months ended August 3, 2019, the Company repurchased 11,013,304 shares under the program at an aggregate cost of $212.5 million, which is inclusive of the shares repurchased under the accelerated share repurchase agreement (the “ASR Contract”) as described below. The Company repurchased 10,264,052 shares at an aggregate cost of $201.5 million during the three months ended May 4, 2019 and an additional 749,252 shares at an aggregate cost of $11.0 million during the three months ended August 3, 2019. As of August 1, 2020,July 31, 2021, the Company had remaining authority under the program to purchase $47.8 million of its common stock.
On April 26, 2019, pursuant Refer to existing stock repurchase authorizations, the Company entered into an ASR Contract with JPMorgan Chase Bank, National Association (in such capacity, the “ASR Counterparty”), to repurchase an aggregate of $170 million ofNote 17 for more information regarding the Company’s common stock. Undernewly authorized share repurchase program.
Dividends
The following sets forth the ASR Contract, the Company made an initial payment of $170 million to the 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 ASR Contract. The Company received a final delivery of an additional 5.4 million shares, or $68 million, under its 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 ASR Contract, less the applicable contractual discount. When combined with the 5.2 million upfront shares received at the inception of the ASR in April 2019, the Company repurchased approximately 10.6 million of its shares under the ASR at an average repurchase price of $16.09cash dividend declared per share. All shares were repurchased in accordance with the Company’s publicly announced ASR program, which was completed during the third quarter of fiscal 2020. The shares delivered under the 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.share:
Dividends | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 |
Cash dividend declared per share | $ | 0.1125 | | | $ | — | | | $ | 0.2250 | | | $ | — | |
During the first quarterand second quarters 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. As a result, there was 0 cash dividend declared during the three and six months ended August 1, 2020. During the three and six months ended August 1, 2020, dividends paid related to the vesting of restricted stock units that are considered non-participating securities and are only entitled to dividend payments once the respective awards vest. Subsequent to the second quarter of fiscal 2021, theThe Company announced that it would resumeresumed 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.
During the three and six months ended August 3, 2019, the Company declared a cash dividend of $0.1125 per share and $0.3375 per share, respectively.
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 holdersFor each of the Company’s commonperiods presented, dividends paid also included the impact from vesting of restricted stock when, asunits that are considered non-participating securities and if any suchare only entitled to dividend is declared bypayments once 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.
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 ourthe Company’s 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.
Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss), net of related income taxes, for the three and six months ended August 1, 2020 and August 3, 2019 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended Aug 1, 2020 |
| Foreign Currency Translation Adjustment | | Derivative Financial Instruments Designated as Cash Flow Hedges | | Defined Benefit Plans | | Total |
Balance at May 2, 2020 | $ | (152,162 | ) | | $ | 7,711 |
| | $ | (8,851 | ) | | $ | (153,302 | ) |
Gains (losses) arising during the period | 31,043 |
| | (7,012 | ) | | (211 | ) | | 23,820 |
|
Reclassification to net loss for (gains) losses realized | 0 |
| | (2,198 | ) | | 71 |
| | (2,127 | ) |
Net other comprehensive income (loss) | 31,043 |
| | (9,210 | ) | | (140 | ) | | 21,693 |
|
Balance at August 1, 2020 | $ | (121,119 | ) | | $ | (1,499 | ) | | $ | (8,991 | ) | | $ | (131,609 | ) |
|
| | | | | | | | | | | | | | | |
| Six Months Ended Aug 1, 2020 |
| Foreign Currency Translation Adjustment | | Derivative Financial Instruments Designated as Cash Flow Hedges | | Defined Benefit Plans | | Total |
Balance at February 1, 2020 | $ | (137,289 | ) | | $ | 6,300 |
| | $ | (8,921 | ) | | $ | (139,910 | ) |
Gains (losses) arising during the period | 16,170 |
| | (3,832 | ) | | (212 | ) | | 12,126 |
|
Reclassification to net loss for (gains) losses realized | 0 |
| | (3,967 | ) | | 142 |
| | (3,825 | ) |
Net other comprehensive income (loss) | 16,170 |
| | (7,799 | ) | | (70 | ) | | 8,301 |
|
Balance at August 1, 2020 | $ | (121,119 | ) | | $ | (1,499 | ) | | $ | (8,991 | ) | | $ | (131,609 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended Aug 3, 2019 |
| Foreign Currency Translation Adjustment | | Derivative Financial Instruments Designated as Cash Flow Hedges | | Defined Benefit Plans | | Total |
Balance at May 4, 2019 | $ | (131,923 | ) |
| $ | 8,663 |
|
| $ | (9,446 | ) | | $ | (132,706 | ) |
Gains (losses) arising during the period | (4,841 | ) | | 1,978 |
| | (151 | ) | | (3,014 | ) |
Reclassification to net earnings for (gains) losses realized | 0 |
| | (1,572 | ) | | 90 |
| | (1,482 | ) |
Net other comprehensive income (loss) | (4,841 | ) | | 406 |
| | (61 | ) | | (4,496 | ) |
Balance at August 3, 2019 | $ | (136,764 | ) | | $ | 9,069 |
| | $ | (9,507 | ) | | $ | (137,202 | ) |
|
| | | | | | | | | | | | | | | |
| Six Months Ended Aug 3, 2019 |
| Foreign Currency Translation Adjustment | | Derivative Financial Instruments Designated as Cash Flow Hedges | | Defined Benefit Plans | | Total |
Balance at February 2, 2019 | $ | (119,546 | ) |
| $ | 2,999 |
|
| $ | (9,632 | ) | | $ | (126,179 | ) |
Cumulative adjustment reclassified from retained earnings due to adoption of new accounting guidance1 | 0 |
| | 1,981 |
| | 0 |
| | 1,981 |
|
Gains (losses) arising during the period | (17,218 | ) | | 5,842 |
| | (55 | ) | | (11,431 | ) |
Reclassification to net earnings for (gains) losses realized | 0 |
| | (1,753 | ) | | 180 |
| | (1,573 | ) |
Net other comprehensive income (loss) | (17,218 | ) | | 4,089 |
| | 125 |
| | (13,004 | ) |
Balance at August 3, 2019 | $ | (136,764 | ) | | $ | 9,069 |
| | $ | (9,507 | ) | | $ | (137,202 | ) |
Notes:
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Foreign Currency Translation Adjustment | | Derivative Financial Instruments Designated as Cash Flow Hedges | | | Defined Benefit Plans | | Total |
| | | | | | | | |
| Three Months Ended Jul 31, 2021 |
Balance at May 1, 2021 | $ | (108,403) | | | $ | (2,863) | | | | $ | (9,636) | | | $ | (120,902) | |
Gains (losses) arising during the period | (5,325) | | | 1,471 | | | | (39) | | | (3,893) | |
Reclassification to net earnings (loss) for losses realized | — | | | 790 | | | | 77 | | | 867 | |
Net other comprehensive income (loss) | (5,325) | | | 2,261 | | | | 38 | | | (3,026) | |
Balance at July 31, 2021 | $ | (113,728) | | | $ | (602) | | | | $ | (9,598) | | | $ | (123,928) | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended Jul 31, 2021 |
| | | | | | | | |
Balance at January 30, 2021 | $ | (105,970) | | | $ | (4,876) | | | | $ | (9,829) | | | $ | (120,675) | |
Gains (losses) arising during the period | (7,758) | | | 3,024 | | | | 77 | | (4,657) | |
Reclassification to net earnings (loss) for losses realized | — | | | 1,250 | | | | 154 | | 1,404 | |
Net other comprehensive income (loss) | (7,758) | | | 4,274 | | | | 231 | | | (3,253) | |
Balance at July 31, 2021 | $ | (113,728) | | | $ | (602) | | | | $ | (9,598) | | | $ | (123,928) | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended Aug 1, 2020 |
| | | | | | | | | |
Balance at May 2, 2020 | $ | (152,162) | | | $ | 7,711 | | | | | $ | (8,851) | | | $ | (153,302) | |
| | | | | | | | | |
Gains (losses) arising during the period | 31,043 | | | (7,012) | | | | | (211) | | | 23,820 | |
Reclassification to net earnings (loss) for (gains) losses realized | — | | | (2,198) | | | | | 71 | | | (2,127) | |
Net other comprehensive income (loss) | 31,043 | | | (9,210) | | | | | (140) | | | 21,693 | |
Balance at August 1, 2020 | $ | (121,119) | | | $ | (1,499) | | | | | $ | (8,991) | | | $ | (131,609) | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended Aug 1, 2020 |
| | | | | | | | | |
Balance at February 1, 2020 | $ | (137,289) | | | $ | 6,300 | | | | | $ | (8,921) | | | $ | (139,910) | |
| | | | | | | | | |
Gains (losses) arising during the period | 16,170 | | | (3,832) | | | | | (212) | | | 12,126 | |
Reclassification to net earnings (loss) for (gains) losses realized | — | | | (3,967) | | | | | 142 | | | (3,825) | |
Net other comprehensive income (loss) | 16,170 | | | (7,799) | | | | | (70) | | | 8,301 | |
Balance at August 1, 2020 | $ | (121,119) | | | $ | (1,499) | | | | | $ | (8,991) | | | $ | (131,609) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| |
1
| During 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). 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. | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Details on reclassifications out of accumulated other comprehensive income (loss) to net earnings (loss) during the three and six months ended August 1, 2020 and August 3, 2019 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | | Location of (Gain) Loss Reclassified from Accumulated OCI into Earnings (Loss) |
| Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Derivative financial instruments designated as cash flow hedges: | | | | | | | | | |
Foreign exchange currency contracts | $ | 829 | | | $ | (2,504) | | | $ | 1,291 | | | $ | (4,495) | | | Cost of product sales |
| | | | | | | | | |
Interest rate swap | 195 | | | 42 | | | 131 | | | 45 | | | Interest expense |
Less income tax effect | (234) | | | 264 | | | (172) | | | 483 | | | Income tax expense (benefit) |
| 790 | | | (2,198) | | | 1,250 | | | (3,967) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Defined benefit plans: | | | | | | | | | |
Net actuarial loss amortization | 106 | | | 97 | | | 211 | | | 193 | | | Other income (expense) |
Prior service credit amortization | (17) | | | (16) | | | (34) | | | (32) | | | Other income (expense) |
Less income tax effect | (12) | | | (10) | | | (23) | | | (19) | | | Income tax expense (benefit) |
| 77 | | | 71 | | | 154 | | | 142 | | | |
Total reclassifications during the period | $ | 867 | | | $ | (2,127) | | | $ | 1,404 | | | $ | (3,825) | | | |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | | Location of (Gain) Loss Reclassified from Accumulated OCI into Earnings (Loss) |
| Aug 1, 2020 | | Aug 3, 2019 | | Aug 1, 2020 | | Aug 3, 2019 | |
Derivative financial instruments designated as cash flow hedges: | | |
Foreign exchange currency contracts | $ | (2,504 | ) | | $ | (1,757 | ) | | $ | (4,495 | ) | | $ | (1,987 | ) | | Cost of product sales |
Interest rate swap | 42 |
| | (44 | ) | | 45 |
| | (90 | ) | | Interest expense |
Less income tax effect | 264 |
| | 229 |
| | 483 |
| | 324 |
| | Income tax expense (benefit) |
| (2,198 | ) | | (1,572 | ) | | (3,967 | ) | | (1,753 | ) | | |
Defined benefit plans: | | | | | | | | | |
Net actuarial loss amortization | 97 |
| | 111 |
| | 193 |
| | 222 |
| | Other income (expense) |
Prior service credit amortization | (16 | ) | | (9 | ) | | (32 | ) | | (19 | ) | | Other income (expense) |
Less income tax effect | (10 | ) | | (12 | ) | | (19 | ) | | (23 | ) | | Income tax expense (benefit) |
| 71 |
| | 90 |
| | 142 |
| | 180 |
| | |
Total reclassifications during the period | $ | (2,127 | ) | | $ | (1,482 | ) | | $ | (3,825 | ) | | $ | (1,573 | ) | | |
(5)Accounts Receivable
Accounts receivable is summarized as follows (in thousands):
| | | Aug 1, 2020 | | Feb 1, 2020 | | Jul 31, 2021 | | Jan 30, 2021 |
Trade | $ | 237,399 |
| | $ | 309,508 |
| Trade | $ | 273,185 | | | $ | 288,782 | |
Royalty | 9,248 |
| | 12,775 |
| Royalty | 22,079 | | | 20,565 | |
Other | 14,224 |
| | 13,429 |
| Other | 17,416 | | | 19,000 | |
| 260,871 |
| | 335,712 |
| | 312,680 | | | 328,347 | |
Less allowances1 | 14,400 |
| | 8,431 |
| |
Less allowances | | Less allowances | 12,765 | | | 14,200 | |
| $ | 246,471 |
| | $ | 327,281 |
| | $ | 299,915 | | | $ | 314,147 | |
Notes:
| |
1
| During the first quarter of 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. Refer to Note 1 for further information. |
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 the Americas and 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.
(6)Inventories
Inventories consist of the following (in thousands):
|
| | | | | | | |
| Aug 1, 2020 | | Feb 1, 2020 |
Raw materials | $ | 585 |
| | $ | 399 |
|
Work in progress | 43 |
| | 52 |
|
Finished goods | 418,799 |
| | 392,678 |
|
| $ | 419,427 |
| | $ | 393,129 |
|
| | | | | | | | | | | |
| Jul 31, 2021 | | Jan 30, 2021 |
Raw materials | $ | 990 | | | $ | 53 | |
Work in progress | 33 | | | 43 | |
Finished goods | 429,266 | | | 389,048 | |
| $ | 430,289 | | | $ | 389,144 | |
The above balances include an allowance to write down inventories to the lower of cost or net realizable value of $42.6$36.9 million and $24.5$35.5 million as of August 1, 2020July 31, 2021 and February 1, 2020,January 30, 2021, respectively.
(7)Income Taxes
Effective Tax Rate
Income tax expense for the interim periods was computed using the income tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items. The Company’s effective income tax rate was an expense of 23.3% for the six months ended July 31, 2021, compared to a benefit of 9.9% for the six months ended August 1, 2020, compared to an expense of 52.2%2020. The change in the effective income tax rate was primarily due to: (1) earnings for the six months ended August 3, 2019. DuringJuly 31, 2021 compared to losses for the six months ended August 1, 2020, the Company recognized a tax benefit of approximately $3.9 million 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. This benefit was mostly offset by a valuation allowance of $3.7 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. Excluding the impact of these items, the change in the effective tax rate was due primarily tosame prior-year period; (2) a shift in the distribution of earnings among the Company’s tax jurisdictions during the six months ended August 1, 2020, compared to the same prior-year period.
On March 27, 2020,period; and (3) an income tax benefit recorded in fiscal 2021 resulting from a change in income tax rates related to the U.S. government enacted the CARES Actability to provide economic relief from the COVID-19 pandemic. The CARES Act includes certain provisions that affect our income taxes, including temporary five-yearcarryback net operating loss carryback provisions, relaxation oflosses to income tax years with a higher federal corporate tax rate, partially offset by a valuation allowance for cumulative net operating losses limiting the net interest deduction limitations and the technical amendment for qualified improvement property deduction.
Company’s ability to recognize deferred tax assets.
Unrecognized Tax Benefit
From time-to-time, the Company is subject to routine income and other income tax audits on various income tax matters around the world in the ordinary course of business. As of August 1, 2020,July 31, 2021, several income tax audits were ongoing for various periods in multiple jurisdictions. These audits could conclude with an assessment of additional income tax liability for the Company. These assessments could arise as the result of timing or permanent differences and could be material to the Company’s net income or future cash flows. In the event the Company disagrees with an assessment from a taxing authority, the Company may elect to appeal, litigate, pursue settlement or take other actions. The Company accrues an amount for its estimate of additional income tax liability which the Company, more likely than not, will incur as a result of the ultimate resolution of income tax audits (“uncertain income tax positions”).
The Company had aggregate accruals for uncertain income tax positions, including penalties and interest, of $42.6 million and $40.0 million as of July 31, 2021 and January 30, 2021, respectively. This includes an accrual of $19.9 million for the estimated transition tax (excluding interest) related to the 2017 Tax Cuts and Jobs Act. The Company reviews and updates the estimates used in the accrual for uncertain income tax positions, as appropriate, as more definitive information or interpretations become available from income taxing authorities, uponand on the completion of income tax audits, uponthe receipt of assessments, upon expiration of statutes of limitation,limitations, or upon occurrence of other events.
During the 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 that its exposure, if any, will have a material impact on its condensed consolidated financial position, results of operations or cash flows.
The Company had aggregate accruals for uncertain tax positions, including penalties and interest, of $35.6 million and $34.0 million as of August 1, 2020 and February 1, 2020, respectively. This includes an accrual of $19.9 million for the estimated transition tax (excluding related interest) related to the 2017 Tax Cuts and Jobs Act for each of the periods ended August 1, 2020 and February 1, 2020.
The Company’s businesses are grouped into 5 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 operating segment are separate operating segments based on region, which have been aggregated into the Asia reportable segment for disclosure purposes.
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) on lease terminations,modifications, restructuring charges and 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 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
Table 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, restructuring charges and 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.Contents
Net revenue and earnings (loss) from operations are summarized as follows for(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 |
Net revenue: | | | | | | | |
Americas Retail | $ | 186,297 | | | $ | 110,065 | | | $ | 341,832 | | | $ | 184,649 | |
Americas Wholesale | 49,858 | | | 20,285 | | | 95,288 | | | 46,160 | |
Europe | 322,723 | | | 205,851 | | | 564,575 | | | 312,324 | |
Asia | 47,813 | | | 50,191 | | | 103,473 | | | 90,576 | |
Licensing | 21,933 | | | 12,147 | | | 43,458 | | | 25,081 | |
Total net revenue | $ | 628,624 | | | $ | 398,539 | | | $ | 1,148,626 | | | $ | 658,790 | |
Earnings (loss) from operations: | | | | | | | |
Americas Retail | $ | 37,916 | | | $ | (4,704) | | | $ | 58,190 | | | $ | (41,377) | |
Americas Wholesale | 12,944 | | | 1,688 | | | 24,499 | | | 3,312 | |
Europe | 51,417 | | | 20,795 | | | 55,615 | | | (23,611) | |
Asia | (4,847) | | | (3,367) | | | (6,655) | | | (26,144) | |
Licensing | 20,154 | | | 11,511 | | | 39,585 | | | 21,605 | |
Total segment earnings (loss) from operations | 117,584 | | | 25,923 | | | 171,234 | | | (66,215) | |
Corporate overhead | (29,115) | | | (29,188) | | | (57,891) | | | (46,109) | |
| | | | | | | |
Asset impairment charges1 | (1,501) | | | (11,969) | | | (1,942) | | | (64,941) | |
Net gains on lease modifications2 | 420 | | | 885 | | | 2,565 | | | 429 | |
| | | | | | | |
Total earnings (loss) from operations | $ | 87,388 | | | $ | (14,349) | | | $ | 113,966 | | | $ | (176,836) | |
| | | | | | | |
Notes:
1.During the three and six months ended July 31, 2021 and August 1, 2020, the Company recognized asset impairment charges related primarily to impairment of certain operating lease ROU assets and impairment of 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 and expected store closures. Refer to Note 2 and Note 15 for more information regarding these asset impairment charges.
2.During the three and six months ended July 31, 2021 and August 3, 2019 (in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Aug 1, 2020 | | Aug 3, 2019 | | Aug 1, 2020 | | Aug 3, 2019 |
Net revenue: | |
| | |
| | | | |
Americas Retail | $ | 110,065 |
| | $ | 198,966 |
| | $ | 184,649 |
| | $ | 375,389 |
|
Americas Wholesale | 20,285 |
| | 41,902 |
| | 46,160 |
| | 88,107 |
|
Europe | 205,851 |
| | 340,509 |
| | 312,324 |
| | 550,564 |
|
Asia | 50,191 |
| | 83,301 |
| | 90,576 |
| | 168,491 |
|
Licensing | 12,147 |
| | 18,542 |
| | 25,081 |
| | 37,360 |
|
Total net revenue | $ | 398,539 |
| | $ | 683,220 |
| | $ | 658,790 |
| | $ | 1,219,911 |
|
Earnings (loss) from operations: | |
| | |
| | | | |
Americas Retail | $ | (4,704 | ) | | $ | 5,957 |
| | $ | (41,377 | ) | | $ | 4,145 |
|
Americas Wholesale | 1,688 |
| | 8,422 |
| | 3,312 |
| | 16,236 |
|
Europe | 20,795 |
| | 51,594 |
| | (23,611 | ) | | 35,267 |
|
Asia | (3,367 | ) | | (4,800 | ) | | (26,144 | ) | | (8,003 | ) |
Licensing | 11,511 |
| | 15,547 |
| | 21,605 |
| | 32,191 |
|
Total segment earnings (loss) from operations | 25,923 |
| | 76,720 |
|
| (66,215 | ) | | 79,836 |
|
Corporate overhead | (29,188 | ) | | (29,229 | ) | | (46,109 | ) | | (55,041 | ) |
Asset impairment charges1 | (11,969 | ) | | (1,504 | ) | | (64,941 | ) | | (3,279 | ) |
Net gains on lease terminations2 | 885 |
| | 0 |
| | 429 |
| | 0 |
|
Total earnings (loss) from operations | $ | (14,349 | ) | | $ | 45,987 |
|
| $ | (176,836 | ) | | $ | 21,516 |
|
______________________________________________________________________1, 2020, amounts recorded represent net gains on lease modifications related primarily to the early termination of certain lease agreements. Notes:
| |
1 | During the three and six months ended August 1, 2020, the Company recognized asset impairment charges related primarily to impairment of certain operating lease ROU assets and impairment of 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. During the three and six months ended August 3, 2019, the Company’s 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 Note 2 and Note 15 for more information regarding these asset impairment charges.
|
| |
2
| During the three and six months ended August 1, 2020, the Company recorded net gains on lease terminations related primarily to the early termination of certain lease agreements.
|
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 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Aug 1, 2020 | | Aug 3, 2019 | | Aug 1, 2020 | | Aug 3, 2019 |
Net revenue: | |
| | |
| | | | |
U.S. | $ | 97,202 |
| | $ | 176,557 |
| | $ | 166,667 |
| | $ | 340,928 |
|
Italy | 36,671 |
| | 86,497 |
| | 56,023 |
| | 136,932 |
|
South Korea | 29,092 |
| | 32,898 |
| | 50,316 |
| | 66,815 |
|
Germany | 33,376 |
| | 31,990 |
| | 44,738 |
| | 50,738 |
|
Canada | 24,174 |
| | 44,001 |
| | 40,851 |
| | 82,582 |
|
Spain | 20,381 |
| | 39,900 |
| | 33,377 |
| | 67,897 |
|
Other foreign countries | 145,496 |
| | 252,835 |
| | 241,737 |
| | 436,659 |
|
Total product sales | 386,392 |
| | 664,678 |
| | 633,709 |
| | 1,182,551 |
|
Net royalties | 12,147 |
| | 18,542 |
| | 25,081 |
| | 37,360 |
|
Net revenue | $ | 398,539 |
| | $ | 683,220 |
| | $ | 658,790 |
| | $ | 1,219,911 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 |
Net revenue: | | | | | | | |
U.S. | $ | 180,265 | | | $ | 97,202 | | | $ | 337,331 | | | $ | 166,667 | |
Italy | 64,803 | | | 36,671 | | | 112,356 | | | 56,023 | |
Germany | 52,204 | | | 33,376 | | | 86,882 | | | 44,738 | |
Canada | 34,425 | | | 24,174 | | | 61,065 | | | 40,851 | |
Spain | 31,737 | | | 20,381 | | | 57,244 | | | 33,377 | |
South Korea | 26,802 | | | 29,092 | | | 54,611 | | | 50,316 | |
Other foreign countries | 216,455 | | | 145,496 | | | 395,679 | | | 241,737 | |
Total product sales | 606,691 | | | 386,392 | | | 1,105,168 | | | 633,709 | |
Net royalties | 21,933 | | | 12,147 | | | 43,458 | | | 25,081 | |
Net revenue | $ | 628,624 | | | $ | 398,539 | | | $ | 1,148,626 | | | $ | 658,790 | |
Due to the seasonal nature of the Company’s business segments, the above net revenue and operating results are not necessarily indicative of the results that may be expected for the full fiscal year.
18
| |
(9) | Borrowings and Finance Lease Obligations |
(9)Borrowings and Finance Lease Obligations
Borrowings and finance lease obligations are summarized as follows (in thousands):
|
| | | | | | | |
| Aug 1, 2020 | | Feb 1, 2020 |
Term loans | $ | 51,823 |
| | $ | 0 |
|
Borrowings under credit facilities | 19,192 |
| | 3,957 |
|
Mortgage debt | 18,821 |
| | 19,132 |
|
Finance lease obligations | 16,253 |
| | 16,535 |
|
Other | 2,301 |
| | 2,636 |
|
| 108,390 |
| | 42,260 |
|
Less current installments | 42,321 |
| | 9,490 |
|
Long-term debt and finance lease obligations | $ | 66,069 |
| | $ | 32,770 |
|
| | | | | | | | | | | |
| Jul 31, 2021 | | Jan 30, 2021 |
Term loans | $ | 55,005 | | | $ | 56,765 | |
Finance lease obligations | 24,794 | | | 22,063 | |
Mortgage debt | 18,184 | | | 18,507 | |
Borrowings under credit facilities | — | | | 7,332 | |
Other | 3,134 | | | 2,597 | |
| 101,117 | | | 107,264 | |
Less current installments | 21,193 | | | 38,710 | |
Long-term debt and finance lease obligations | $ | 79,924 | | | $ | 68,554 | |
Term Loans
As 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 six monthsfiscal year ended August 1, 2020.January 30, 2021. These loans are primarily unsecured, have terms ranging from one-to-fiveone-to-five years and provide annual interest rates ranging between 0.5%1.3% to 1.5%2.2%. Certain of these loans also have an option to extend the term for a period of up to five years, subject to certain terms and conditions. As of August 1, 2020,July 31, 2021 and January 30, 2021, the Company had outstanding borrowings of $51.8$55.0 million and $56.8 million under these borrowing arrangements.arrangements, respectively.
Finance Lease Obligations
During fiscal 2018, the Company entered into a finance lease related to equipment used in its European distribution center located in the Netherlands. The finance lease primarily provides for monthly minimum lease payments through May 2027 with an effective interest rate of approximately 6%. During fiscal 2021, the Company also entered into finance leases for equipment used in its European distribution centers located in Italy. These finance lease obligations totaled $19.2 million and $18.4 million as of July 31, 2021 and January 30, 2021, respectively.
The Company also has smaller finance leases related primarily to computer hardware and software. As of July 31, 2021 and January 30, 2021, these finance lease obligations totaled $5.6 million and $3.7 million, respectively.
Mortgage Debt
During fiscal 2017, the Company entered into a ten-year $21.5 million real estate secured loan (the “Mortgage Debt”) which is secured by the Company’s U.S. distribution center based in Louisville, Kentucky. 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, 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.
Credit Facilities
On April 21, 2020,During fiscal 2021, the Company entered into an amendment of its senior secured asset-based revolving credit facility with Bank of America, N.A. and the other lenders party thereto to extend the maturity date of the credit facility to April 21, 2023, among other changes (as amended, the “Credit Facility”). The Credit Facility provides for a borrowing capacity in an amount up to $120 million, including a Canadian sub-facility up to $20 million, subject to a borrowing base. Based on applicable accounts receivable and inventory balances
as of August 1, 2020,July 31, 2021, the Company could have borrowed up to $81$116 million under the Credit Facility. The Credit Facility has an option to expand the borrowing capacity by up to $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 0.75% to 1.25%) or at LIBOR plus an applicable margin (varying from 1.75% to 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-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 0.75% to 1.25%) or at the Canadian BA rate plus an applicable margin (varying from 1.75% to 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 and (ii) the Canadian BA rate for a one-month interest period, plus 1.0%, provided that the Canadian prime rate may not be less than 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 August 1, 2020,July 31, 2021, the Company had $2.1 million in outstanding standby letters of credit, 0no outstanding documentary letters of credit and 0no 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 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 committed and uncommitted borrowing agreements, primarily for working capital purposes, with various banks in Europe. Some of these agreements include certain equity-based financial covenants. As of August 1, 2020,July 31, 2021, the Company had $9.4 million inno outstanding borrowings, 0no outstanding documentary letters of credit and $134.3$121.3 million available for future borrowings under these agreements. The agreements are denominated primarily in euros and provide for annual interest rates ranging from 0.7%1.1% to 1.3%.
The Company, 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. During the second quarter of fiscal 2021, the borrowing capacity under the multicurrency borrowing agreement increased from $20.0 million to $30.0 million. The Company had $9.6 millionno outstanding borrowings under this agreement as of July 31, 2021 and $4.0$7.3 million in outstanding borrowings under this agreement as of August 1, 2020 and February 1, 2020, respectively.January 30, 2021.
Mortgage Debt
On February 16, 2016, theThe Company, entered intothrough its Japan subsidiary, maintains 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 andshort-term uncommitted bank borrowing agreement that 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 August 1, 2020,borrowing capacity up to $4.6 million, primarily for working capital purposes. The Company had no outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $18.8 million. At February 1, 2020, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $19.1 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, 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.
On February 16, 2016, the Company also entered into a separate interest rate swapthis 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 liability was approximately $1.3 million and $0.3 million as of August 1, 2020July 31, 2021 and February 1, 2020, respectively.
Finance Lease Obligations
During fiscal 2018, the Company entered into a finance lease related to equipment used in its European distribution center located in the Netherlands. The finance lease primarily provides for monthly minimum lease
payments through May 2027 with an effective interest rate of approximately 6%. The finance lease obligation was $12.6 million for each of the periods ended August 1, 2020 and February 1, 2020.
The Company also has smaller finance leases related primarily to computer hardware and software. As of August 1, 2020 and February 1, 2020, these finance lease obligations totaled $3.7 million and $4.0 million,January 30, 2021, respectively.
Other
From time-to-time, the Company will obtain other financing in foreign countries for working capital to finance its local operations.
| |
(10) | Convertible Senior Notes and Related Transactions |
(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 (the “Notes”) 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 arrears on April 15 and October 15 of each year, beginning on October 15, 2019.year. 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. 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.
If As of July 31, 2021, none of the Company undergoes a “fundamental change,” as defined in the Indenture, subject to certain conditions allowing holders of the Notes may require theto convert had been met. The Company expects to purchase for cash all or any portion of their Notes. The fundamental change purchase price will be 100% ofsettle 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.
Under GAAP, certain convertible debt instruments that may be settled2024 in cash on conversion are required to be separately accounted for as liability and equity components of the instrumentany excess in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Notes, theshares.
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 conversion feature.value. The carrying amount of the equity component which was recognized as a debt discount, represented the difference between the proceeds from the issuance of the Notes and the fair value of the liability component of the Notes.component. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will beis being 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 three and six months ended August 1, 2020, the Company recorded approximately $2.6 million and $5.2 million, respectively, of interest expense related to the amortization of the debt discount.
During the three and six months ended August 3, 2019, the Company recorded approximately $2.4 million and $2.7 million of interest expense related to the amortization of the debt discount.
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. In accounting for the debt issuance costs related to the issuance of the Notes, theThe 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 condensed consolidated balance sheets. These costs are being amortized to interest expense using the effective interest method over the term of the Notes.
During the three and six months ended July 31, 2021, the Company recorded $2.8 million and $5.6 million, respectively, of interest expense related to the amortization of the debt discount. During the three and six months ended August 1, 2020, the Company recorded $0.2approximately $2.6 million and $0.4$5.2 million, respectively, of interest expense related to the amortization of the debt issuance costs. During each of the three and six months ended August 3, 2019, the Company recorded $0.2 million related to the amortization of debt issuance costs. Debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.discount.
The Notes consist of the following components as of August 1, 2020 and February 1, 2020 (in thousands):
| | | Aug 1, 2020 | | Feb 1, 2020 | | Jul 31, 2021 | | Jan 30, 2021 |
Liability component: | | | | Liability component: | | | |
Principal | $ | 300,000 |
| | $ | 300,000 |
| Principal | $ | 300,000 | | | $ | 300,000 | |
Unamortized debt discount | (43,820 | ) | | (49,017 | ) | Unamortized debt discount | (33,061) | | | (38,623) | |
Unamortized issuance costs | (3,192 | ) | | (3,620 | ) | Unamortized issuance costs | (2,335) | | | (2,763) | |
Net carrying amount | $ | 252,988 |
| | $ | 247,363 |
| Net carrying amount | $ | 264,604 | | | $ | 258,614 | |
| | | | | | | |
Equity component, net1 | $ | 42,320 |
| | $ | 42,320 |
| Equity component, net1 | $ | 42,320 | | | $ | 42,320 | |
Notes:
| |
11Included in paid-in capital within stockholders’ equity on the condensed consolidated balance sheets and is net of debt issuance costs and deferred taxes. | Included in paid-in capital within stockholders’ equity on the condensed consolidated balance sheets and is net of debt issuance costs and deferred taxes. |
As of August 1, 2020July 31, 2021 and February 1, 2020,January 30, 2021, the fair value, net of unamortized debt discount and issuance costs, of the Notes was approximately $163.0$305.6 million and $272.0$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 had the option to purchase a total of approximately 11.6 million shares of its common stock at an initial strike 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 had the option to purchase a total of
approximately 11.6 millionshares of the Company’s common stock at an initial strike 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. 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 to the extent the market price per share of the Company’s common stock exceeds the adjusted strike price of the convertible note hedges. 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 adjusted strike price of the warrants. As these transactions meet certain accounting criteria, theThe convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period.
The Company had a deferred tax liability of $11.2$8.8 million in connection with the debt discount associated with the Notes and a deferred tax asset of $12.3$9.7 million in connection with the convertible note hedge transactions
for each of the periods ended August 1, 2020July 31, 2021 and February 1, 2020.January 30, 2021. The net deferred tax impact was included in deferred tax assets on the Company’s condensed consolidated balance sheets.
| |
(11) | Share-Based Compensation |
(11)Share-Based Compensation
The following table summarizes the share-based compensation expense recognized under all of the Company’s stock plans during the three and six months ended August 1, 2020 and August 3, 2019(in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Aug 1, 2020 | | Aug 3, 2019 | | Aug 1, 2020 | | Aug 3, 2019 |
Stock options | $ | 820 |
| | $ | 697 |
| | $ | 1,515 |
| | $ | 1,287 |
|
Stock awards/units | 3,135 |
| | 4,205 |
| | 8,061 |
| | 8,020 |
|
Employee Stock Purchase Plan | 48 |
| | 84 |
| | 213 |
| | 147 |
|
Total share-based compensation expense | $ | 4,003 |
| | $ | 4,986 |
| | $ | 9,789 |
| | $ | 9,454 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 |
Stock options | $ | 907 | | | $ | 820 | | | $ | 1,814 | | | $ | 1,515 | |
Stock awards/units | 3,837 | | | 3,135 | | | 6,910 | | | 8,061 | |
Employee Stock Purchase Plan | 58 | | | 48 | | | 138 | | | 213 | |
Total share-based compensation expense | $ | 4,802 | | | $ | 4,003 | | | $ | 8,862 | | | $ | 9,789 | |
Unrecognized compensation cost related to nonvested stock options and nonvested stock awards/units totaled approximately $9.9$6.2 million and $21.9$35.1 million, respectively, as of August 1, 2020.July 31, 2021. This cost is expected to be recognized over a weighted average period of 1.8 years.
The weighted average grant date fair value per share of stock options granted was $4.33 and $5.41 during the six months ended August 1, 2020 and August 3, 2019, respectively.
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 June 11, 2020,30, 2021, the Company made a grant of 792,057 stock options to certain of its executive employees. On June 29, 2020, the Company made a grant of 736,026695,566 nonvested stock units to certain of its executive employees. These nonvested stock units are subject to certain performance-based or market-based vesting conditions.
In connection with a new employment agreement entered into between the Company and Carlos Alberini (the “Alberini Employment Agreement”), who became the Company’s Chief Executive Officer on February 20, 2019, the Company granted Mr. Alberini 600,000 stock options and 250,000 nonvested stock units which were subject to the achievement of certain performance-based vesting conditions. Mr. Alberini was also granted 150,000 restricted stock units which were considered contingently returnable as a result of certain service conditions set forth in the Alberini Employment Agreement. The service conditions were satisfied during the six months ended August 1, 2020.
On June 10, 2019, the Company made a special grant of 1,077,700 stock options to certain of its employees. On June 20, 2019, the Company also granted select key management 205,339 nonvested stock units which were subject to certain performance-based vesting conditions.
Annual Grants
On April 13, 2020, the Company made an annual grant of 743,800 nonvested stock awards/units to its employees. On March 29, 2019, the Company made an annual grant of 5,100 stock options and 280,700 nonvested stock awards/units to its employees.
Performance-Based Awards
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 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% 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.
The following table summarizes the activity for nonvested performance-based units during the six months ended August 1, 2020:July 31, 2021:
| | | | | | | | | | | |
| Number of Units | | Weighted Average Grant Date Fair Value |
Nonvested at January 30, 2021 | 769,632 | | | $ | 16.15 | |
Granted | 242,898 | | | 26.40 | |
Vested | (166,761) | | | 14.07 | |
Forfeited | (186,714) | | | 21.83 | |
Nonvested at July 31, 2021 | 659,055 | | | $ | 18.85 | |
|
| | | | | | |
| Number of Units | | Weighted Average Grant Date Fair Value |
Nonvested at February 1, 2020 | 1,140,023 |
| | $ | 16.66 |
|
Granted | 310,881 |
| | 9.65 |
|
Vested | (310,413 | ) | | 13.99 |
|
Forfeited | (249,139 | ) | | 12.24 |
|
Nonvested at August 1, 2020 | 891,352 |
| | $ | 16.38 |
|
22
Market-Based Awards
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.
The following table summarizes the activity for nonvested market-based units during the six months ended August 1, 2020:July 31, 2021:
|
| | | | | | |
| Number of Units | | Weighted Average Grant Date Fair Value |
Nonvested at February 1, 2020 | 288,202 |
| | $ | 13.43 |
|
Granted1 | 526,711 |
| | 7.20 |
|
Vested1 | (305,901 | ) | | 10.62 |
|
Nonvested at August 1, 2020 | 509,012 |
| | $ | 8.67 |
|
| | | | | | | | | | | |
| Number of Units | | Weighted Average Grant Date Fair Value |
Nonvested at January 30, 2021 | 509,012 | | | $ | 8.67 | |
Granted1 | 494,623 | | | 21.48 | |
Vested1 | (125,822) | | | 20.28 | |
| | | |
Nonvested at July 31, 2021 | 877,813 | | | $ | 14.22 | |
Notes:
| |
11As a result of the achievement of certain market-based vesting conditions, there were 41,955 shares that vested in addition to the original target number of shares granted in fiscal 2019. (12)Related Party Transactions | Amounts include, as a result of the achievement of certain market-based vesting conditions, 101,566 shares that vested in addition to the original target number of shares granted in fiscal 2018. |
| |
(12) | 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, who 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 corporate headquarters in Los Angeles, California, from partnerships affiliated with the Marciano TrustsEntities and certain of their affiliates. There were 4 of these leases in effect as of August 1, 2020July 31, 2021 with expiration or option exercise dates ranging from calendar years 20202023 to 2021. 2030.
The Company, is currentlythrough a wholly-owned Canadian subsidiary, leases warehouse and administrative facilities in discussionsMontreal, Quebec from a partnership affiliated with the related party landlords for extensionsMarciano Entities. During the second quarter of fiscal 2022, the leases forCompany entered into a lease amendment to extend the corporate headquarter location in Los Angeles and the office location in Paris, and in the meantime, those leases are continuing on a month-to-month basis underlease 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 terms.
remaining in full force and effect.
Aggregate lease costs recorded under these 4 related party leases were approximately $4.3 million and $2.6 million for each of the six months ended July 31, 2021 and August 1, 2020, and August 3, 2019.respectively. The Company believes that the terms of the related party leases have not been significantly affected by the fact that the Company and the lessors are related.
Aircraft Arrangements
The Company periodically charters aircraft owned by entities affiliated with the Marciano Trusts (the “Aircraft Entities”),Entities through informal arrangements with the AircraftMarciano Entities and independent third-party management companies contracted by the Aircraftsuch Marciano Entities to manage their aircraft. The total fees paid under these arrangements for the six months ended July 31, 2021 and August 1, 2020 were approximately $1.9 million and $1.2 million. There were 0 fees paidmillion, respectively.
Minority Investment
The Company owns a 30% interest in a privately held men’s footwear company (the “Footwear Company”) in which the Marciano Entities also 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 matures in November 2023. As of both July 31, 2021 and January 30, 2021, the Company had a note receivable of $0.2 million included in other assets in its condensed consolidated balance sheets related to outstanding borrowings by the Footwear Company under these arrangements for the six months ended August 3, 2019.this revolving credit facility.
These related party disclosures should be read in conjunction with the disclosure concerning related party transactions in the Company’s Annual Report on Form 10-K for the year ended February 1, 2020.
(13) Commitments and Contingencies | |
(13) | Commitments and Contingencies |
Investment Commitments
As of August 1, 2020,July 31, 2021, the Company had an unfunded commitment to invest €3.6€2.3 million ($4.32.7 million) in a private equity fund. Refer to Note 15 for further information.
Legal and Other Proceedings
The Company is involved in legal proceedings, arising both in the ordinary course of business and otherwise, including the proceedings described below as well as various other claims and other matters incidental to the Company’s business. Unless otherwise stated, the resolution of any particular proceeding is not currently expected to have a material adverse impact on the Company’s financial position, results of operations or cash flows. Even if such an impact could be material, wethe Company may not be able to estimate the reasonably possible loss or range of loss until developments in the proceedings have provided sufficient information to support an assessment.
The Company has received customs tax assessment notices from the Italian Customs Agency (“ICA”) regarding its customs tax audit of 1 of the Company’s European subsidiaries for the period from July 2010 through December 2012. Such assessments totaled €9.8 million ($11.6 million), including potential penalties and interest. The Company strongly disagreed with the ICA’s positions and therefore filed appeals with the Milan First Degree Tax Court (“MFDTC”). Those appeals were split into a number of different cases that were then heard by different sections of the MFDTC. The MFDTC ruled in favor of the Company on all of these appeals. The ICA subsequently appealed €9.7 million ($11.411.5 million) of these favorable MFDTC judgments with the Appeals Court. To date, €8.5 million ($10.010.1 million) have been decided in favor of the Company and €1.2 million ($1.4 million) have been decided in favor of the ICA. 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 plans to appealhas appealed the decision to the Supreme Court. The ICA has appealed most of the favorable Appeals Court rulings to the Supreme Court. To date, of the cases that have been appealed to the Supreme Court, €0.4 million ($0.5 million) have been decided in favor of the Company based on the merits of the case and €1.1 million ($1.3 million) have been remanded back to the lower court for further consideration. There can be no assurances the Company will be successful in the 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, results of operations or cash flows.
On January 19, 2021, a former model for the Company filed an action against the Company's Chief Creative Officer and the Company in the California Superior Court in Los Angeles (Jane Doe v. Paul Marciano, et al.). The complaint asserts several claims based on allegations that the former model was treated improperly by Mr. 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 been moved to arbitration and is still at an early stage. Mr. Marciano and the Company dispute these claims fully and intend to contest them vigorously. In March and April 2021, the Company received separate communications from two other individuals containing similar allegations against Mr. Marciano and the
Company. Mr. Marciano and the Company also dispute these allegations fully. Each individual who contacted the Company in March and April is represented by the same attorney who represents the plaintiff in the January action, though no complaint has been filed with respect to either of these allegations. Though Mr. Marciano and the Company dispute each of these allegations fully, in order to avoid the cost of litigation and without admitting liability or fault, the Company and Mr. Marciano entered into a settlement agreement with the individual who sent the March letter, resolving the claims for an aggregate total amount of $300,000.
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 every third anniversary beginning 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 condensed consolidated balance sheet. The carrying value of the redeemable noncontrolling interest related to Guess Brazil was $1.0 million and $1.2$0.9 million as of August 1, 2020July 31, 2021 and February 1, 2020,January 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 condensed consolidated balance sheet. The carrying value of the redeemable noncontrolling interest related to Guess CIS was $3.0$3.1 million and $3.5$3.0 million as of August 1, 2020July 31, 2021 and February 1, 2020,January 30, 2021, respectively.
A reconciliation of the total carrying amount of redeemable noncontrolling interests for the six months ended August 1, 2020 and August 3, 2019 is as follows (in thousands):
| | | | | | | | | | | |
| Six Months Ended |
| Jul 31, 2021 | | Aug 1, 2020 |
Beginning balance | $ | 3,920 | | | $ | 4,731 | |
Foreign currency translation adjustment | 154 | | | (710) | |
| | | |
| | | |
| | | |
| | | |
Ending balance | $ | 4,074 | | | $ | 4,021 | |
|
| | | | | | | |
| Six Months Ended |
| Aug 1, 2020 | | Aug 3, 2019 |
Beginning balance | $ | 4,731 |
| | $ | 4,853 |
|
Foreign currency translation adjustment | (710 | ) | | (69 | ) |
Ending balance | $ | 4,021 |
| | $ | 4,784 |
|
(14)Defined Benefit Plans
| |
(14) | Defined Benefit Plans |
Supplemental Executive Retirement Plan
On August 23, 2005, the Board of Directors of the Company adopted aThe Company’s 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.
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 $68.8$73.4 million and $67.7$72.1 million as of August 1, 2020July 31, 2021 and February 1, 2020,January 30, 2021, respectively, and were included in other assets in the Company’s condensed consolidated balance sheets. As a result of changes in the value of the insurance policy investments, the Company recorded unrealized gains of $2.2 million in other income and expense during the three and six months ended July 31, 2021 and $5.1 million and $2.0 million in other income and expense during the three and six months ended August 1, 2020, respectively, and unrealized gains (losses) of $(0.2) million and $3.0 million in other income and expense during the three and six months ended August 3, 2019, respectively. The projected benefit obligation was $51.7
$51.9 million and $51.9$52.3 million as of August 1, 2020July 31, 2021 and February 1, 2020,January 30, 2021, respectively, and was included in accrued expenses and other long-term liabilities in the Company’s condensed consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of $0.5 million and $1.0 million were made during the three and six months ended July 31, 2021, respectively. SERP benefit payments of $0.3 million and $0.8 million were made during the three and six months ended August 1, 2020, respectively. SERP benefit payments of $0.4 million and $0.8 million were made during the three and six months ended August 3, 2019, respectively.
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 as such, are treated under pension accounting in accordance with authoritative guidance. Under the Swiss 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.
As of August 1, 2020July 31, 2021 and February 1, 2020,January 30, 2021, the foreign pension plans had a total projected benefit obligation of $36.2$40.9 million and $34.8$41.5 million, respectively, and plan assets held in independent investment fiduciaries of $29.8$34.5 million and $28.9$35.0 million, respectively. The net liability of $6.4 million and $5.9 million was included in other long-term liabilities in the Company’s condensed consolidated balance sheets as of August 1, 2020both July 31, 2021 and February 1, 2020, respectively.January 30, 2021.
The components of net periodic defined benefit pension cost for the three and six months ended August 1, 2020 and August 3, 2019 related to the Company’s defined benefit plans are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| |
| SERP | | Foreign Pension Plans | | Total |
| | | | | |
| Three Months Ended Jul 31, 2021 |
Service cost | $ | — | | | $ | 793 | | | $ | 793 | |
Interest cost | 288 | | | 19 | | | 307 | |
Expected return on plan assets | — | | | (52) | | | (52) | |
Net amortization of unrecognized prior service credit | — | | | (17) | | | (17) | |
Net amortization of actuarial losses | 20 | | | 86 | | | 106 | |
Net periodic defined benefit pension cost | $ | 308 | | | $ | 829 | | | $ | 1,137 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Six Months Ended Jul 31, 2021 |
| | | | | |
Service cost | $ | — | | | $ | 1,583 | | | $ | 1,583 | |
Interest cost | 577 | | | 38 | | | 615 | |
Expected return on plan assets | — | | | (104) | | | (104) | |
Net amortization of unrecognized prior service credit | — | | | (34) | | | (34) | |
Net amortization of actuarial losses | 40 | | | 171 | | | 211 | |
Net periodic defined benefit pension cost | $ | 617 | | | $ | 1,654 | | | $ | 2,271 | |
|
| | | | | | | | | | | |
| Three Months Ended Aug 1, 2020 |
| SERP | | Foreign Pension Plans | | Total |
Service cost | $ | 0 |
| | $ | 766 |
| | $ | 766 |
|
Interest cost | 320 |
| | 7 |
| | 327 |
|
Expected return on plan assets | 0 |
| | (45 | ) | | (45 | ) |
Net amortization of unrecognized prior service credit | 0 |
| | (16 | ) | | (16 | ) |
Net amortization of actuarial losses | 10 |
| | 87 |
| | 97 |
|
Net periodic defined benefit pension cost | $ | 330 |
| | $ | 799 |
| | $ | 1,129 |
|
| | | | | | | | | | | | | | | | | |
| SERP | | Foreign Pension Plans | | Total |
| | | | | |
| Three Months Ended Aug 1, 2020 |
Service cost | $ | — | | | $ | 766 | | | $ | 766 | |
Interest cost | 320 | | | 7 | | | 327 | |
Expected return on plan assets | — | | | (45) | | | (45) | |
Net amortization of unrecognized prior service credit | — | | | (16) | | | (16) | |
Net amortization of actuarial losses | 10 | | | 87 | | | 97 | |
Net periodic defined benefit pension cost | $ | 330 | | | $ | 799 | | | $ | 1,129 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Six Months Ended Aug 1, 2020 |
| | | | | |
Service cost | $ | — | | | $ | 1,530 | | | $ | 1,530 | |
Interest cost | 639 | | | 15 | | | 654 | |
Expected return on plan assets | — | | | (90) | | | (90) | |
Net amortization of unrecognized prior service credit | — | | | (32) | | | (32) | |
Net amortization of actuarial losses | 20 | | | 173 | | | 193 | |
Net periodic defined benefit pension cost | $ | 659 | | | $ | 1,596 | | | $ | 2,255 | |
|
| | | | | | | | | | | |
| Six Months Ended Aug 1, 2020 |
| SERP | | Foreign Pension Plans | | Total |
Service cost | $ | 0 |
| | $ | 1,530 |
| | $ | 1,530 |
|
Interest cost | 639 |
| | 15 |
| | 654 |
|
Expected return on plan assets | 0 |
| | (90 | ) | | (90 | ) |
Net amortization of unrecognized prior service credit | 0 |
| | (32 | ) | | (32 | ) |
Net amortization of actuarial losses | 20 |
| | 173 |
| | 193 |
|
Net periodic defined benefit pension cost | $ | 659 |
| | $ | 1,596 |
| | $ | 2,255 |
|
|
| | | | | | | | | | | |
| Three Months Ended Aug 3, 2019 |
| SERP | | Foreign Pension Plans | | Total |
Service cost | $ | 0 |
| | $ | 808 |
| | $ | 808 |
|
Interest cost | 481 |
| | 67 |
| | 548 |
|
Expected return on plan assets | 0 |
| | (78 | ) | | (78 | ) |
Net amortization of unrecognized prior service credit | 0 |
| | (9 | ) | | (9 | ) |
Net amortization of actuarial losses | 15 |
| | 96 |
| | 111 |
|
Net periodic defined benefit pension cost | $ | 496 |
| | $ | 884 |
| | $ | 1,380 |
|
(15)Fair Value Measurements
|
| | | | | | | | | | | |
| Six Months Ended Aug 3, 2019 |
| SERP | | Foreign Pension Plans | | Total |
Service cost | $ | 0 |
| | $ | 1,615 |
| | $ | 1,615 |
|
Interest cost | 962 |
| | 135 |
| | 1,097 |
|
Expected return on plan assets | 0 |
| | (155 | ) | | (155 | ) |
Net amortization of unrecognized prior service credit | 0 |
| | (19 | ) | | (19 | ) |
Net amortization of actuarial losses | 31 |
| | 191 |
| | 222 |
|
Net periodic defined benefit pension cost | $ | 993 |
| | $ | 1,767 |
| | $ | 2,760 |
|
| |
(15) | 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 beare based on the best information available, including the Company’s own data.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of August 1, 2020 and February 1, 2020 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements | | Fair Value Measurements |
| | at Aug 1, 2020 | | at Feb 1, 2020 |
Recurring Fair Value Measures | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Foreign exchange currency contracts | | $ | 0 |
| | $ | 116 |
| | $ | 0 |
| | $ | 116 |
| | $ | 0 |
| | $ | 4,854 |
| | $ | 0 |
| | $ | 4,854 |
|
Total | | $ | 0 |
| | $ | 116 |
| | $ | 0 |
| | $ | 116 |
| | $ | 0 |
| | $ | 4,854 |
| | $ | 0 |
| | $ | 4,854 |
|
Liabilities: | | | | | | | | |
| | | | | | | | |
|
Foreign exchange currency contracts | | $ | 0 |
| | $ | 5,938 |
| | $ | 0 |
| | $ | 5,938 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
Interest rate swap | | 0 |
| | 1,317 |
| | 0 |
| | 1,317 |
| | 0 |
| | 348 |
| | 0 |
| | 348 |
|
Deferred compensation obligations | | 0 |
| | 13,538 |
| | 0 |
| | 13,538 |
| | 0 |
| | 14,091 |
| | 0 |
| | 14,091 |
|
Total | | $ | 0 |
| | $ | 20,793 |
| | $ | 0 |
| | $ | 20,793 |
| | $ | 0 |
| | $ | 14,439 |
| | $ | 0 |
| | $ | 14,439 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements | | Fair Value Measurements |
| | at Jul 31, 2021 | | 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 | | $ | — | | | $ | 2,012 | | | $ | — | | | $ | 2,012 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | 2,012 | | | $ | — | | | $ | 2,012 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Liabilities: | | | | | | | | | | | | | | | | |
Foreign exchange currency contracts | | $ | — | | | $ | 287 | | | $ | — | | | $ | 287 | | | $ | — | | | $ | 4,481 | | | $ | — | | | $ | 4,481 | |
Interest rate swap | | — | | | 745 | | | — | | | 745 | | | — | | | 999 | | | — | | | 999 | |
Deferred compensation obligations | | — | | | 17,323 | | | — | | | 17,323 | | | — | | | 15,612 | | | — | | | 15,612 | |
Total | | $ | — | | | 18,355 | | | $ | — | | | $ | 18,355 | | | $ | — | | | $ | 21,092 | | | $ | — | | | $ | 21,092 | |
Foreign exchange currency contracts may be entered into by the Company 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 Company’s 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.
The Company included €1.2€2.5 million ($1.42.9 million) and €1.2€2.4 million ($1.33.0 million), respectively, in other assets in the Company’s condensed consolidated balance sheetsheets related to its investment in a private equity fund for the periods ended August 1, 2020July 31, 2021 and February 1, 2020. As permitted in accordance with authoritative guidance, theJanuary 30, 2021, respectively. 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 the six months ended August 1, 2020, the Company recorded minimal unrealized losses in other income (expense) as a result of changes in the value of the private equity investment. This compares to unrealized losses of €0.1 million ($0.1 million) included in other income (expense) during the six months ended August 3, 2019. As of August 1, 2020,July 31, 2021, the Company had an unfunded commitment to invest an additional €3.6€2.3 million ($4.32.7 million) in the private equity fund.
The fair values of the Company’s debt instruments (see Note 9) 9) are based on the amount of future cash flows associated with each instrument discounted using the Company’s incremental borrowing rate. As ofAugust 1, 2020 July 31, 2021 and February 1, 2020,January 30, 2021, the carrying value 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.
Long-Lived Assets
Long-lived assets, such as property and equipment and 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 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 whichthat are used as a regional marketing tool to build brand awareness and promote the Company’s current product. Provided the flagship locations continue to meet the 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 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 of ROU assets and discounted future cash 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 above. The impairment loss calculations require management to apply judgment in estimating future cash flows 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 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:as the
following: 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 in Note 1, the COVID-19 pandemic has materially impacted the Company’s financial results during the three and six months ended July 31, 2021 and August 1, 2020 and could continue to impact the Company’s operations in ways we arethe Company is not able to predict today due to the developingevolving situation. The Company has made reasonable assumptions and judgments to determine the fair value of the assets tested based on the facts and circumstances that were available as 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.
The Company recorded asset impairment charges of $1.5 million and $1.9 million during the three and six months ended July 31, 2021, respectively. The Company recognized minimal impairment on ROU assets primarily in Europe in the three and six months ended July 31, 2021. The Company recognized $1.5 million and $1.9 million in impairment of property and equipment related to certain retail locations primarily in Europe and Asia during the three and six months ended July 31, 2021, respectively. This compares to asset impairment charges of $12.0 million and $64.9 million during the three and six months ended August 1, 2020, respectively. The Company recognized $8.2 million and $36.5 million in impairment of certain operating lease ROU assets primarily in North America and Europe during the three and six months ended August 1, 2020, respectively. The Company also recognized $3.7 million and $28.5 million in impairment of property and equipment 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 during the three and six months ended August 1, 2020 respectively. This compares to $1.5 million and $3.3 million in impairment of property and equipment related to certain retail locations primarily in Europe and, to a lesser extent, North America resulting from under-performance and expected store closures during the three and six months ended August 3, 2019,, respectively. Refer to Note 2 for further information on impairment charges recognized on operating lease 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 as reporting units for goodwill impairment testing. Goodwill associated with its China retail component of its Asia segment was fully impaired during fiscal 2020. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the amount of any impairment loss to be recognized for that reporting unit is determined through a quantitative test 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 above. 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 based on the difference between a reporting unit’s fair value and its carrying value.
The COVID-19 pandemic has materially impacted the Company’s financial results duringbusinesses beginning in the three and six months ended August 1, 2020 as discussed further in Note 1.first quarter of fiscal 2021. As a result, of these conditions, the Company concluded that a triggering event had occurred resulting in the need to perform quantitative interim impairment testing overon the Company’s goodwill and flagship assets during the first quarteras of fiscal 2021.May 2, 2020. The testing concluded that the fair values of the respective reporting units exceeded their carrying amounts.amounts as of May 2, 2020. Accordingly, the Company did not record any asset impairment charges on its goodwill or flagship assets. In performing its assessment, the Company believed 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.
The COVID-19 pandemic has continued to impact the Company’s businesses during the first six months of fiscal 2022. During the second quarter of fiscalthree months ended July 31, 2021, 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 the three and six months ended August 1, 2020. In performing its assessment, the Company believes it made reasonable accounting estimates based on the facts and circumstances that were available as
(16)Derivative Financial Instruments
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.
| |
(16) | 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-denominated purchases of merchandise and U.S. dollar- and British pound-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 that 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 on certain 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.
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 for certain of these 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 9 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 August 1, 2020,July 31, 2021, 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 that approximates the time the hedged merchandise inventory is sold. The Company may hedge 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 (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.
The Company has also 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 (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 (expense).
Summary of Derivative Instruments
The fair value of derivative instruments in the condensed consolidated balance sheets as of August 1, 2020 and February 1, 2020 is as follows (in thousands):
|
| | | | | | | | | |
| Derivative Balance Sheet Location | | Fair Value at Aug 1, 2020 | | Fair Value at Feb 1, 2020 |
ASSETS: | | | |
| | |
|
Derivatives designated as hedging instruments: | | | |
| | |
|
Cash flow hedges: | | | | | |
Foreign exchange currency contracts | Other current assets/ Other assets | | $ | 116 |
| | $ | 3,987 |
|
Derivatives not designated as hedging instruments: | | | | | |
|
Foreign exchange currency contracts | Other current assets/ Other assets | | 0 |
| | 867 |
|
Total | | | $ | 116 |
| | $ | 4,854 |
|
LIABILITIES: | | | |
| | |
|
Derivatives designated as hedging instruments: | | | |
| | |
|
Cash flow hedges: | | | | | |
Foreign exchange currency contracts | Accrued expenses/ Other long-term liabilities | | $ | 4,184 |
| | $ | 0 |
|
Interest rate swap | Other long-term liabilities | | 1,317 |
| | 348 |
|
Total derivatives designated as hedging instruments | | | 5,501 |
| | 348 |
|
Derivatives not designated as hedging instruments: | | | |
| | |
|
Foreign exchange currency contracts | Accrued expenses | | 1,754 |
| | 0 |
|
Total | | | $ | 7,255 |
| | $ | 348 |
|
| | | | | | | | | | | | | | | | | |
| Fair Value at Jul 31, 2021 | | Fair Value at Jan 30, 2021 | | Derivative Balance Sheet Location |
ASSETS: | | | | | |
Derivatives designated as hedging instruments: | | | | | |
Cash flow hedges: | | | | | |
Foreign exchange currency contracts | $ | 1,948 | | | $ | — | | | Other current assets/Other assets |
| | | | | |
Total derivatives designated as hedging instruments | 1,948 | | | — | | | |
Derivatives not designated as hedging instruments: | | | | | |
Foreign exchange currency contracts | 64 | | | — | | | Other current assets/Other assets |
Total | $ | 2,012 | | | $ | — | | | |
LIABILITIES: | | | | | |
Derivatives designated as hedging instruments: | | | | | |
Cash flow hedges: | | | | | |
Foreign exchange currency contracts | $ | 62 | | | $ | 3,326 | | | Accrued expenses/ Other long-term liabilities |
Interest rate swap | 745 | | | 999 | | | Other long-term liabilities |
Total derivatives designated as hedging instruments | 807 | | | 4,325 | | | |
Derivatives not designated as hedging instruments: | | | | | |
Foreign exchange currency contracts | 225 | | | 1,155 | | | Accrued expenses |
| | | | | |
| | | | | |
Total | $ | 1,032 | | | $ | 5,480 | | | |
Derivatives Designated as Hedging Instruments
Foreign Exchange Currency Contracts Designated as Cash Flow Hedges
During the six months ended August 1, 2020,July 31, 2021, the Company purchased U.S. dollar forward contracts in Europe totaling US$81.075.0 million that were designated as cash flow hedges. As of August 1, 2020,July 31, 2021, the Company had
had forward contracts outstanding for its European operations of US$139.5114.0 million to hedge forecasted merchandise purchases, which are expected to mature over the next 1712 months.
As of August 1, 2020,July 31, 2021, accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a minimal net unrealized loss, of approximately $0.4 million, net of tax, of which a net gain of $0.8$0.6 million will be recognized in cost of product sales over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values.
At February 1, 2020,January 30, 2021, the Company had forward contracts outstanding for its European operations of US$148.6100.0 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 Mortgage Debt. This interest rate swap agreement matures in January 2026 and converts the nature of the Company’s Mortgage Debt from LIBOR floating-rate debt to fixed-rate debt, resulting in a swap fixed rate of approximately 3.06%.
As of August 1, 2020,July 31, 2021, accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized loss of $1.0$0.6 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 quarter-end values.
The following table summarizes the gains (losses) before taxes recognized on the derivative instruments designated as cash flow hedges in OCI and net earnings (loss)for the three and six months ended August 1, 2020 and August 3, 2019 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Gains (Losses) Recognized in OCI | | Location of Gains (Losses) Reclassified from Accumulated OCI into Earnings (Loss) | | Gains (Losses) Reclassified from Accumulated OCI into Earnings (Loss) |
| Three Months Ended | | | Three Months Ended |
| Aug 1, 2020 | | Aug 3, 2019 | | | Aug 1, 2020 | | Aug 3, 2019 |
Derivatives designated as cash flow hedges: | |
| | |
| | | | |
| | |
|
Foreign exchange currency contracts | $ | (7,758 | ) | | $ | 3,063 |
| | Cost of product sales | | $ | 2,504 |
| | $ | 1,757 |
|
Interest rate swap | (139 | ) | | (777 | ) | | Interest expense | | (42 | ) | | 44 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gains (Losses) Recognized in OCI | | Location of Gains (Losses) Reclassified from Accumulated OCI into Earnings (Loss) | | Gains (Losses) Reclassified from Accumulated OCI into Earnings (Loss) |
| | | | |
| Jul 31, 2021 | | Aug 1, 2020 | | | Jul 31, 2021 | | Aug 1, 2020 |
| Three Months Ended |
Derivatives designated as cash flow hedges: | | | | | | | | | |
Foreign exchange currency contracts | $ | 1,781 | | | $ | (7,758) | | | Cost of product sales | | $ | (829) | | | $ | 2,504 | |
| | | | | | | | | |
| | | | | | | | | |
Interest rate swap | (148) | | | (139) | | | Interest expense | | (195) | | | (42) | |
|
| | | | | | | | | | | | | | | | | |
| Gains (Losses) Recognized in OCI | | Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Loss) | | Gains (Losses) Reclassified from Accumulated OCI into Earnings (Loss) |
| Six Months Ended | | | Six Months Ended |
| Aug 1, 2020 | | Aug 3, 2019 | | | Aug 1, 2020 | | Aug 3, 2019 |
Derivatives designated as cash flow hedges: | |
| | |
| | | | |
| | |
|
Foreign exchange currency contracts | $ | (3,348 | ) | | $ | 7,718 |
| | Cost of product sales | | $ | 4,495 |
| | $ | 1,987 |
|
Interest rate swap | (1,013 | ) | | (996 | ) | | Interest expense | | (45 | ) | | 90 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | | | |
| | | | |
| | | | | | | | |
| Six Months Ended |
Derivatives designated as cash flow hedges: | | | | | | | | | |
Foreign exchange currency contracts | $ | 3,292 | | | $ | (3,348) | | | Cost of product sales | | $ | (1,291) | | | $ | 4,495 | |
| | | | | | | | | |
| | | | | | | | | |
Interest rate swap | 122 | | | (1,013) | | | Interest expense | | (131) | | | (45) | |
The following table summarizes net after-tax derivative activity recorded in accumulated other comprehensive income (loss) (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Aug 1, 2020 | | Aug 3, 2019 | | Aug 1, 2020 | | Aug 3, 2019 |
Beginning balance gain | $ | 7,711 |
| | $ | 8,663 |
| | $ | 6,300 |
| | $ | 2,999 |
|
Cumulative adjustment from adoption of new accounting guidance1 | 0 |
| | 0 |
| | 0 |
| | 1,981 |
|
Net gains (losses) from changes in cash flow hedges | (7,012 | ) | | 1,978 |
| | (3,832 | ) | | 5,842 |
|
Net gains reclassified into earnings (loss) | (2,198 | ) | | (1,572 | ) | | (3,967 | ) | | (1,753 | ) |
Ending balance gain (loss) | $ | (1,499 | ) | | $ | 9,069 |
| | $ | (1,499 | ) | | $ | 9,069 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 |
Beginning balance gain (loss) | $ | (2,863) | | | $ | 7,711 | | | $ | (4,876) | | | $ | 6,300 | |
| | | | | | | |
Net gains (losses) from changes in cash flow hedges | 1,471 | | | (7,012) | | | 3,024 | | | (3,832) | |
Net (gains) losses reclassified into earnings (loss) | 790 | | | (2,198) | | | 1,250 | | | (3,967) | |
Ending balance loss | $ | (602) | | | $ | (1,499) | | | $ | (602) | | | $ | (1,499) | |
______________________________________________________________________Notes:
| |
1
| During 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). Upon adoption of this guidance, the Company reclassified $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. |
Foreign Exchange Currency Contracts Not Designated as Hedging Instruments
As of August 1, 2020,July 31, 2021, the Company had euro foreign exchange currency contracts to purchase US$62.515.0 million expected to mature over the next ten months.one month. As of January 30, 2021, the Company had euro foreign exchange currency contracts to purchase US$19.0 million.
The following table summarizes the gains (losses) before taxes recognized on the derivative instruments not designated as hedging instruments in other income (expense) for the three and six months ended August 1, 2020 and August 3, 2019(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location of Gain Recognized in Earnings (Loss) | | Gain Recognized in Earnings (Loss) |
| | Three Months Ended | | Six Months Ended |
| | Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 |
| | | | | | | | | |
Foreign exchange currency contracts | Other income (expense) | | $ | 485 | | | $ | (4,706) | | | $ | 556 | | | $ | (3,618) | |
| | | | | | | | | |
(17)Subsequent Events
|
| | | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Recognized in Earnings (Loss) | | Gain (Loss) Recognized in Earnings (Loss) |
| | Three Months Ended | | Six Months Ended |
| | Aug 1, 2020 | | Aug 3, 2019 | | Aug 1, 2020 | | Aug 3, 2019 |
Derivatives not designated as hedging instruments: | | | |
| | |
| | | | |
Foreign exchange currency contracts | Other income (expense) | | $ | (4,706 | ) | | $ | 233 |
| | $ | (3,618 | ) | | $ | 808 |
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At February 1, 2020, the Company had euro foreign exchange currency contracts to purchase US$46.1 million.
Dividends
On September 2, 2020,August 25, 2021, the Company announced that it was resuming its quarterly cash dividend program and declared a regular quarterly cash dividend of $0.1125 per share on the Company’s common stock. The Company also decided not to declare any cash dividends for the first or second quarters of fiscal 2021. The cash dividend will be paid on October 2, 2020September 24, 2021 to shareholders of record as of the close of business on September 16, 2020.8, 2021.
Share Repurchase Program
On August 25, 2021, the Company announced that its Board of Directors has authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to $200 million of its common stock. The newly authorized $200 million program includes $48 million remaining under the Company's previously authorized $500 million repurchase program. 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.
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
ITEM 2.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‑Q, we are referring to Guess?, Inc. (“GUESS?”) and its subsidiaries on a consolidated basis.
Important Factors Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including documents incorporated by reference herein, contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be contained in the Company’sour other reports filed under the Securities Exchange Act of 1934, as amended, in itsour press releases and in other documents. In addition, from time-to-time,
Except for historical information contained herein, certain matters discussed in this Quarterly Report, including statements concerning the Company, through its management, may make oral forward-looking statements. These statements relate to expectations, analyses and other information based on current plans, forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our goals, future prospects, potential actions and impacts related to the coronavirus (or “COVID-19”) pandemic,COVID-19 pandemic; statements concerning our future outlook; statements concerning our expectations, goals, future prospects, global cost reduction opportunities, and profitability efforts, capital allocation plans, cash needs and current business strategies and strategic initiatives. Theseinitiatives; and statements expressing optimism or pessimism about future operating results and growth opportunities are forward-looking statements that are identifiedmade pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are frequently indicated by their use of terms and phrases such as “anticipate,“expect,” “could,” “will,” “should,” “goal,” “strategy,” “believe,” “estimate,” “continue,” “could,“outlook,” “plan,” “create,” “estimate,” “expect,” “goal,” “intend,” “may,” “outlook,” “pending,” “plan,” “predict,” “project,” “see,” “should,” “strategy,” “will,” “would,” and other similar terms, are only expectations, and phrases, including references to assumptions.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable,involve known and unknown risks and uncertainties, which may cause actual results couldin future periods to differ materially from those projected or assumed.what is currently anticipated. Factors which may cause actual results in future periods to differ materially from current expectations include, among others: our ability to maintain our brand image and reputation; domestic and international economic or political conditions, including economic and other events that could negatively impact consumer confidence and discretionary consumer spending; the continuation or worsening of impacts related to the COVID-19 pandemic, including business, financial, human capital, litigation and other impacts to the Companyus and itsour partners; our ability to successfully negotiate rent relief or other lease-related terms with our landlords; our ability to successfully negotiate or defer our vendor obligations; our ability to maintain adequate levels of liquidity; changes to estimates related to impairments, inventory and other reserves, including the impact of the Coronavirus Aid, Relief, and Economic Security (“CARES”)CARES Act, enacted in March 2020, which were made using the best information available at the time; changes in the competitive marketplace and in our commercial relationships; our ability to anticipate and adapt to changing consumer preferences and trends; our ability to manage our inventory commensurate with customer demand; risks related to the timing and costs of delivering merchandise to our stores and our wholesale customers; unexpected or unseasonable weather conditions; our ability to effectively operate our various retail concepts, including securing, renewing, modifying or terminating leases for store locations; our ability to successfully and/or timely implement our growth strategies and other strategic initiatives; our ability to successfully implement or update information technology systems, including enhancing our global omni-channel capabilities; our ability to expand internationally and operate in regions where we have less experience, including through joint ventures; risks related to our convertible senior notes issued in April 2019, including our ability to settle the liability in cash; our ability to successfully or timely implement plans for cost reductions; our ability to effectively and efficiently manage the volume and costs associated with our European distribution centers without incurring shipment delays; our ability to attract and retain key personnel; obligations or changes in estimates arising from new or existing litigation, income tax and other regulatory proceedings; risks related to the complexity of the Tax Reform, future clarifications and legislative amendments thereto, as well as our ability to accurately interpret and predict its impact on our cash flows and financial condition; the risk of economic uncertainty associated with the transition period of the United Kingdom’s departure from the European Union (“Brexit”) or any other similar referendums that may be held; the occurrence of unforeseen epidemics, such as the COVID-19 pandemic; other catastrophic events; changes in U.S. or foreign income tax or tariff policy, including changes to tariffs on imports into the U.S.; accounting adjustments to our unaudited financial statements identified during the completion of our annual independent audit of financial statements and financial controls or from subsequent events arising after issuance of this release; risk of future non-cash asset impairments, including goodwill, right of-use
right-of-use lease assets and/or other store asset impairments; restructuring charges; our ability to adapt to new regulatory compliance and disclosure obligations; risks associated with our foreign operations, such as violations of laws prohibiting improper payments and the burdens of complying with a variety of foreign laws and regulations (including global data privacy regulations); risks associated with the acts or omissions of
our third party vendors, including a failure to comply with our vendor code of conduct or other policies; risks associated with cyber-attacks and other cyber security risks; risks associated with our ability to properly collect, use, manage and secure consumer and employee data; risks associated with our vendors’ ability to maintain the strength and security of information technology systems; and changes in economic, political, social and other conditions affecting our foreign operations and sourcing, including the impact of currency fluctuations, global income tax rates and economic and market conditions in the various countries in which we operate. TheseIn addition to these factors, the economic, technological, managerial, and other risks and uncertainties are discussedidentified in further detail under “Part I, Item 1A. Risk Factors” contained in the Company’sour most recent Annual Report on Form 10-K, for the fiscal year ended February 1, 2020 and under “Part II, Item 1A. Risk Factors” contained herein, as such risk factors may be updated in ourand other filings made from time-to-time with the Securities and Exchange Commission, (“SEC”) afterincluding but not limited to the daterisk factors discussed therein, could cause actual results to differ materially from current expectations. The current global economic climate, length and severity of this report.the COVID-19 pandemic, and uncertainty surrounding potential changes in U.S. policies and regulations may amplify many of these risks. We do not intend, and undertake no obligation to publicly update ouror revise any forward-looking statements, to reflectwhether as a result of new information, future events or circumstances. If we do update or correct one or more of these statements, investors and others should not conclude that we will make additional updates or corrections.otherwise.
COVID-19 Business Update
The COVID-19 coronavirus (or “COVID-19”) pandemic has had and is continuing to have a material impact on the Company’s financial performance. The pandemic is ongoing and dynamic in nature and, to date, the Company has experienced temporary closures in key regions globally.our businesses. During the second quarter of fiscal 2021, the Company gradually reopened most of its global fleet of brick-and-mortar stores resulting in stores being closed for approximately 30% and 35% of the total days during the three and six months ended August 1, 2020, respectively. As of August 1, 2020, approximately 95% of the Company’s stores were open, with the majority of closed stores located primarily within interior malls in California. The Company will continue to reopen stores (and/or close again, if appropriate), as state and local guidelines and conditions permit or require, taking an informed, measured approach based on a number of factors. The Company’s e-commerce sites have remained open in all regions. In addition, retail stores that are open have and continue to experience significant reductions in traffic and revenue. Many of the Company’s wholesale and licensing partners have also substantially reduced their operations. The Company has been bringing back furloughed store associates and support staff as stores reopen.
During the first half of fiscal 2021, in addition to the negative impact from2022, we experienced lower net revenue the Company’s operating results reflected asset impairment charges as well as additional inventory valuation reserves and higher allowances for markdowns and doubtful accounts duecompared to the ongoing effectssecond quarter of fiscal 2020 as we remained challenged by lower demand, capacity restrictions and temporary store closures. In light of the COVID-19 pandemic. These charges were partially offset by lower SG&Acurrent environment, we continue to strategically manage expenses driven primarily by expense savings, both one-time, such as furloughs and temporary salary reductions, and permanent, such as headcount reductions and lower discretionary spending. In addition, the Company benefited from various government assistance programs related primarilyin order to the recovery of employee payroll costs as well as certain favorable tax treatments.
During the first half of fiscal 2021, the Company implemented a number of measures to help mitigate the operating and financial impact of the pandemic, including: (i) furloughing its U.S. and Canada store associates and significant portions of its U.S. and Canada corporate and distribution center associates and permanently reducing U.S. corporate headcount; (ii) implementing temporary tiered salary reductions for management level corporate employees, including its executive officers; (iii) deferring annual merit increases; (iv) executing substantial reductions in expenses, store occupancy costs, capital expenditures and overall costs, including through reduced inventory purchases; (v) working globally with country management teams to maximize the Company’s participation in all eligible government or other initiatives available to businesses or employees impacted by the COVID-19 pandemic; (vi) drawing down on certain credit facilities and entering into certain term loans to ensure financial flexibility and maintain maximum liquidity; (vii) engaging with landlords to negotiate rent deferrals or other rent concessions; (viii) working with vendors to extend payment terms; and (ix) postponing its decision related to the payment of its quarterly cash dividend.protect profitability.
During the second quarter of fiscal 2021, as2022, we gradually reopened our stores that were closed at the situation beganend of the first quarter of fiscal 2022 due to stabilize,COVID-19 restrictions. The overall impact resulted in stores being closed for approximately 5% of the Company repaid a significant portion of its previously drawn down credit facilities, continued to bring back furloughed employees, eliminated the temporary tiered salary reductions and invested in share repurchases to return value to its shareholders. Subsequent tototal days during the second quarter of fiscal 2022, primarily in Europe and Canada. As of July 31, 2021, the Company also announced that it would resume paying its
quarterly cash dividend beginning in the third quarteronly one of fiscal 2021, but decided to not declare any cash dividends for the first and second quarters of fiscal 2021.
Although we are unable to determine with any degree of accuracy the length and severity of the COVID-19 pandemic, we expect it will continue to have a material impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows into the foreseeable future.stores was closed.
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. 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.
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) on lease terminations,modifications, restructuring charges and certain non-recurring credits (charges), if any. The Americas RetailWe believe this segment includes the Company’s retailreporting reflects how our business segments are managed and e-commerce operations in the Americas. The Americas Wholesale segment includes the Company’s wholesale operations in the Americas. The Europe segment includes the Company’s retail, e-commercehow each segment’s performance is evaluated by our chief operating decision maker to assess performance 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, restructuring charges and 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.make resource allocation decisions. Information regarding these segments is summarized in “Part I, Item 1. Financial Statements – Note 8 – Segment Information.”
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-operated and licensed retail stores, wholesale customers and distributors, as well as our online sites. We also derive royalty revenue from worldwide licensing activities.
Foreign Currency Volatility
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. dollar amounts.
Some 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 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. In addition, 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. When these foreign exchange rates weaken versus the U.S. dollar at the time the respective U.S. dollar denominated payment is made relative to the payments made in the comparable period, our product margins could be unfavorably impacted.
In addition, there are certain real estate leases that 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, we may be exposed to volatility related to unrealized gains or losses on the translation of the present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end.
During the first six months of fiscal 2021,2022, the average U.S. dollar rate was strongerweaker against the Euro, Canadian dollar, Chinese yuan, euro,Mexican peso, Korean won Mexican peso,and British pound and stronger against the Japanese yen, Russian rouble and Turkish lira and weaker against the Japanese yen compared to the average rate in the same prior-year period. This had an overall unfavorablefavorable impact
on the translation of our international revenues and a favorable impact on lossearnings from operations for the six months ended August 1, 2020July 31, 2021 compared to the same prior-year period.
If the U.S. dollar strengthens in fiscal 2022 relative to the respective fiscal 20202021 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 the remainder of fiscal 2021,2022, particularly in Canada, Europe (primarily with respect to the euro, Turkish lira and Russian rouble) and Mexico. Alternatively, if the U.S. dollar weakens relative to the respective fiscal 20202021 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 the remainder of fiscal 2021,2022, particularly in these regions.
The Company entersWe enter into derivative financial instruments to 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 3. Quantitative and Qualitative Disclosures About Market Risk.”
Strategy
In December 2019 and updated in March 2021, Carlos Alberini, the Company’sour Chief Executive Officer, shared his strategic vision and implementation plan for execution which included the identification of several key priorities to drive revenue and operating profit growth over the next fiveseveral years. These priorities are: (i) brand relevancy; (ii) product excellence; (iii) customer centricity; (iii)(iv) global footprint; (iv) product excellence; and (v) functional capabilities; each as further described below:
Brand Relevancy. 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 and rely less on promotional activity. We will continue to use 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 different 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.
Global Footprint. We will continue to expand the reach of our brands by optimizing the productivity and profitability of our current footprint and expanding our distribution channels.
Product Excellence. We will extend our product offering to provide our customers with products for the different occasions of their lifestyles. We will seek to better address local product needs.
Functional Capabilities. We expect to drive material operational improvements in the next fivefour years to leverage and support our global business more effectively, primarily in the areas of logistics, sourcing, product development and production, inventory management, and overall infrastructure.
While we have been challenged with the extremely difficult situation presented by the COVID-19 pandemic, we believe that the opportunities identified above remain in place for the long-term and provide a solid roadmap to grow our business, increase profitability over time and create significant value for our shareholders. In the short-term, we remain focused on enhancing our omni-channel platform centered around our consumer and accelerating efforts to gain efficiencies across our global operations and rationalize our store portfolios, measures which we believe will also maximize our liquidity to address the current crisis.
Capital Allocation
We plan to continue to prioritize capital allocation toward investments that support growth and infrastructure, while remaining highly disciplined in the way we allocate capital across 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.
Comparable Store Sales
Except as described below in connection with the COVID-19 pandemic, the Company reportswe 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. These criteria are consistent with the metric used by management for internal reporting and analysis to measure performance of the 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 resulting fromand other various restrictions during the COVID-19 pandemic, the Company haswe have not disclosed any comparable store sales measures when discussing the results of operations for the three and six months ended July 31, 2021, compared to the three and six months ended August 1, 2020. We do not believe that comparable store sales measures will bebetween these periods are not meaningful to the evaluation of the Company’sour results until the impact from the temporary store closures resulting from thedue to such COVID-19 pandemic has normalized.variations.
Other
The Company operatesWe operate on a 52/53-week fiscal year calendar which ends on the Saturday nearest to January 31 of each year. The six months ended August 1, 2020July 31, 2021 had the same number of days as the six months ended August 3, 2019.1, 2020.
Executive Summary
Overview
Net loss attributableGiven the significant impacts to Guess?, Inc. was $20.4 million, or diluted lossour business that began in fiscal 2021 as a result of $0.31 per common share,the COVID-19 pandemic, this Executive Summary includes highlights of our performance for the quarterthree and six months ended July 31, 2021 compared to both (a) the three and six months ended August 3, 2019 (the pre-COVID periods from two years prior) and (b) the three and six months ended August 1, 2020 compared(the COVID-impacted periods from one year ago). Management believes the additional comparison to netthe two-year ago period is helpful to provide additional context to the current year results.
Net earnings attributable to Guess?, Inc. increased 141.1% to $61.1 million, or diluted earnings per share (“EPS”) of $0.91, for the quarter ended July 31, 2021 compared to $25.3 million, or diluted earningsEPS of $0.35 per common share, for the quarter ended August 3, 2019. Net earnings attributable to Guess?, Inc. increased $81.4 million for the quarter ended July 31, 2021 compared to a net loss attributable to Guess?, Inc. of $20.4 million, or diluted loss per share of $0.31 for the quarter ended August 1, 2020.
During the quarter ended August 1, 2020, the CompanyJuly 31, 2021, we recognized $12.0$1.5 million of asset impairment charges; $0.9$0.4 million of net gains on lease terminations; a net credit of $0.2modifications; $0.1 million of certain professional servicesservice and legal fees and related (credits) costs; $2.5 million of separation charges; $2.6$2.8 million of amortization of debt discount related to the Company’sour convertible senior notesnotes; and $8.1$0.1 million in additional income tax expense from certain discrete tax adjustments (or a combined $19.7$3.0 million, or $0.30$0.05 per share, negative impact after considering the related income tax benefit of these adjustments of $4.4$1.0 million). Excluding the impact of these items, adjusted net loss attributable to Guess?, Inc. was $0.6 million and adjusted diluted loss was $0.01 per common share for the quarter ended August 1, 2020. During the quarter ended August 3, 2019, the Company recognized $1.5 million of asset impairment charges; $0.4 million of certain professional services and legal fees and related costs and $2.4 million of amortization of debt discount related to the Company’s convertible senior notes (or a combined $2.1 million, or $0.03 per share, negative impact after considering the related tax benefit of these adjustments and adjustments to uncertain tax positions excluded from results in prior years totaling $2.3 million). Excluding the impact of
these items, adjusted net earnings attributable to Guess?, Inc. were $27.4$64.1 million and adjusted diluted earnings were $0.38 per common shareEPS was $0.96 for the quarter ended August 3, 2019.July 31, 2021. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under “Non-GAAP Measures.”
HighlightsSecond Quarter Fiscal 2022 Results Compared to Second Quarter Fiscal 2020
For the second quarter of fiscal 2022, we recorded net earnings attributable to Guess?, Inc. of $61.1 million, a 141.1% increase from $25.3 million for the Company’s performancesecond quarter of fiscal 2020. Diluted EPS increased 160.0% to $0.91 for the second quarter of fiscal 2022 compared to $0.35 for the second quarter of fiscal 2020. We estimate a positive impact from our share buybacks of $0.11 and a minimal impact from currency on diluted EPS in the second quarter of fiscal 2022 when compared to the second quarter of fiscal 2020.
Net Revenue. Total net revenue for the second quarter of fiscal 2022 decreased 8.0% to $628.6 million from $683.2 million in the second quarter of fiscal 2020. In constant currency, net revenue decreased by 10.8%.
Earnings from Operations. Earnings from operations for the second quarter of fiscal 2022 increased 90.0% to $87.4 million (including $0.4 million net gains on lease modifications, $1.5 million non-cash impairment charges taken on certain long-lived store related assets and a $0.3 million favorable currency translation impact) from $46.0 million (including $1.5 million in non-cash impairment charges taken on certain long-lived store related assets) in the second quarter of fiscal 2020. Operating margin in the second quarter of fiscal 2022 increased 7.2% to 13.9% from 6.7% in the second quarter of fiscal 2020, driven primarily by lower markdowns, lower occupancy costs and higher initial markups. The negative impact of currency on operating margin for the quarter ended August 1, 2020was approximately 30 basis points.
Second Quarter Fiscal 2022 Results Compared to Second Quarter Fiscal 2021
For the second quarter of fiscal 2022, we recorded net earnings attributable to Guess?, Inc. of $61.1 million as compared to a net loss attributable to Guess?, Inc. of $20.4 million for the second quarter of fiscal 2021. Diluted EPS increased to $0.91 for the second quarter of fiscal 2022 compared to a diluted loss per share
of $0.31 for the same prior-year quarter. We estimate a positive impact from our share buybacks and currency of $0.03 and $0.01, respectively, on diluted EPS in the second quarter of fiscal 2022 when compared to the same prior-year period are presented below, followed by a more comprehensive discussion under “Results of Operations”:quarter.
Operations
Net Revenue. Total net revenue decreased 41.7% to $398.5 million for the second quarter ended August 1, 2020,of fiscal 2022 increased 57.7% to $628.6 million from $683.2$398.5 million in the same prior-year quarter. In constant currency, net revenue increased by 51.1%.
Earnings (Loss) from Operations. Earnings from operations for the second quarter of fiscal 2022 increased to $87.4 million (including $0.4 million net gains on lease modifications, $1.5 million non-cash impairment charges taken on certain long-lived store related assets and a $2.3 million favorable currency translation impact) from a loss from operations of $14.3 million (including $0.9 million net gains on lease modifications and $12.0 million in non-cash impairment charges taken on certain long-lived store related assets) in the same prior-year quarter. Operating margin in the second quarter of fiscal 2022 increased 17.5% to 13.9% from a negative 3.6% in the same prior-year quarter, driven primarily by overall leveraging of expenses. The positive impact of currency on operating margin for the quarter was approximately 30 basis points.
Six-Month Period Fiscal 2022 Results Compared to Six-Month Period Fiscal 2020
For the six months ended July 31, 2021, we recorded net earnings attributable to Guess?, Inc. of $73.1 million compared to $3.9 million for the six months ended August 3, 2019. Diluted EPS was $1.10 for the six months ended July 31, 2021 compared to $0.05 for the six months ended August 3, 2019. We estimate a net positive impact from our share buybacks and prior year convertible notes transaction of $0.16 and a negative currency impact of $0.06 on diluted EPS for the six months ended July 31, 2021 when compared to the six months ended August 3, 2019.
Net Revenue. Total net revenue for the first six months of fiscal 2022 decreased 5.8% to $1.15 billion from $1.22 billion for the six months ended August 3, 2019. In constant currency, net revenue decreased by 41.2%8.3%.
GrossEarnings from Operations. Earnings from operations for the first six months of fiscal 2022 were $114.0 million (including $2.6 million net gains on lease modifications, $1.9 million non-cash impairment charges taken on certain long-lived store related assets and a $1.9 million unfavorable currency translation impact) compared to $21.5 million (including $3.3 million non-cash impairment charges taken on certain long-lived store related assets) for the six months ended August 3, 2019. Operating margin (gross profitfor the first six months of fiscal 2022 increased 8.1% to 9.9% from 1.8% for the six months ended August 3, 2019, driven primarily by lower occupancy costs, higher initial markups and lower markdowns. The negative impact of currency on operating margin for the first six months of fiscal 2020was approximately 50 basis points.
Six-Month Period Fiscal 2022 Results Compared to Six-Month Period Fiscal 2021
For the six months ended July 31, 2021, we recorded net earnings attributable to Guess?, Inc. of $73.1 million compared to net loss attributable to Guess?, Inc. of $178.0 million for the six months ended August 1, 2020. Diluted EPS was $1.10 for the six months ended July 31, 2021 compared to diluted loss per share of $2.72 during the same prior-year period. We estimate a net positive impact from our share buybacks and prior year convertible notes transaction and currency of $0.05 and $0.10, respectively, on diluted EPS for the six months ended July 31, 2021 when compared to the same prior-year period.
Net Revenue. Total net revenue for the first six months of fiscal 2022 increased 74.4% to $1.15 billion from $658.8 million in the same prior-year period. In constant currency, net revenue increased by 66.6%.
Earnings (Loss) from Operations. Earnings from operations for the first six months of fiscal 2022 were $114.0 million (including $2.6 million net gains on lease modifications, $1.9 million non-cash impairment charges taken on certain long-lived store related assets and a $1.6 million favorable currency translation impact) compared to loss from operations of $176.8 million (including $0.4 million net gains on lease modifications and $64.9 million non-cash impairment charges taken on certain long-lived store related assets) in the same prior-year period. Operating margin in fiscal 2022 increased 36.7% to 9.9% from negative 26.8%
in the same prior-year period, driven primarily by overall leveraging of expenses. The impact of currency on operating margin was minimal for the six months ended July 31, 2021.
Key Balance Sheet Accounts
•We had $458.9 million in cash and cash equivalents and $0.2 million in restricted cash as a percentage of total net revenue) decreased 200 basis pointsJuly 31, 2021 compared to 36.9%$328.0 million in cash and cash equivalents and $0.2 million in restricted cash at August 1, 2020.
◦As of July 31, 2021, we had $55.0 million in outstanding borrowings under our term loans and no outstanding borrowings under our credit facilities compared to $51.8 million in outstanding borrowings under our term loans and $19.2 million in outstanding borrowings under our revolving credit facilities as of August 1, 2020.
◦There were no share repurchases during the quarter ended July 31, 2021. We repurchased 4.0 million shares of common stock for $38.9 million (including commissions) during the quarter ended August 1, 2020, from 38.9%2020.
•Accounts receivable consists of trade receivables relating primarily to our wholesale business in Europe and, to a lesser extent, to our wholesale businesses in the same prior-year period.
Selling, generalAmericas and administrative (“SG&A”) expensesAsia, royalty receivables relating to our licensing operations, credit card and retail concession receivables related to our retail businesses and certain other receivables. Accounts receivable increased by $53.4 million, or 21.7%, to $299.9 million as a percentage of total net revenue (“SG&A rate”) increased 570 basis pointsJuly 31, 2021 compared to 37.7% for the quarter ended$246.5 million at August 1, 2020,2020. On a constant currency basis, accounts receivable increased by $50.5 million, or 20.5%, when compared to 32.0% in the same prior-year period. SG&A expenses decreased 31.1% to $150.3 million for the quarter ended August 1, 2020,2020.
•Inventory increased by $10.9 million, or 2.6%, to $430.3 million as of July 31, 2021, from $218.2$419.4 million in the same prior-year period.
During the quarter endedat August 1, 2020, the Company recognized asset impairment charges of $12.02020. On a constant currency basis, inventory increased by $4.5 million, or 1.1%, when compared to $1.5 million in the same prior-year period.
During the quarter ended August 1, 2020, the Company recorded net gains on lease terminations of $0.9 million related primarily to the early termination of certain lease agreements.
| |
• | Operating margin decreased 10.3% to negative 3.6% for the quarter ended August 1, 2020, from 6.7% in the same prior-year period, driven primarily by overall deleveraging of expenses due to the negative impact from the COVID-19 pandemic on our global operations. Higher asset impairment charges unfavorably impacted operating margin by 280 basis points during the quarter ended August 1, 2020 compared to the same prior-year period. Separation charges unfavorably impacted operating margin by 60 basis points during the quarter ended August 1, 2020. Net gains on lease terminations favorably impacted operating margin by 20 basis points during the quarter ended August 1, 2020. Lower expenses related to certain professional service and legal fees and related costs favorably impacted operating margin by 10 basis points during the quarter ended August 1, 2020. Loss from operations was $14.3 million for the quarter ended August 1, 2020, compared to earnings from operations of $46.0 million in the same prior-year period.
|
Other income, net (including interest income and expense), was minimal for the quarter ended August 1, 2020, compared to other expense, net of $11.0 million in the same prior-year period.
The effective income tax rate changed to negative 44.6% for the quarter ended August 1, 2020, compared to 25.2% in the same prior-year period. The Company’s effective tax rate for the quarter ended August 1, 2020 included the unfavorable impact from certain discrete tax adjustments totaling $8.1 million.
Key Balance Sheet Accounts
| |
• | The Company had $328.0 million in cash and cash equivalents and $0.2 million in restricted cash as of August 1, 2020, compared to $131.1 million in cash and cash equivalents and $0.5 million in restricted cash at August 3, 2019.
|
| |
◦ | As of August 1, 2020, the Company had $51.8 million in outstanding borrowings under its term loans and $19.2 million in outstanding borrowings under its credit facilities to help ensure financial flexibility and liquidity in response to uncertainty surrounding the COVID-19 pandemic. |
| |
◦ | During the three and six months ended August 1, 2020, the Company repurchased 4.0 million shares of its common stock for $38.9 million (including commissions). During fiscal 2020, the Company used $170 million of proceeds from its offering of convertible senior notes to |
enter into an accelerated share repurchase program (“ASR Contract”), pursuant to which it received a total of approximately 10.6 million shares. The Company also repurchased shares of its common stock for $118.1 million (including commissions) during fiscal 2020.
| |
• | 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 the Americas and Asia, royalty receivables relating to its licensing operations, credit card and retail concession receivables related to its retail businesses and certain other receivables. Accounts receivable decreased by $46.5 million, or 15.9%, to $246.5 million as of August 1, 2020, from $293.0 million at August 3, 2019. On a constant currency basis, accounts receivable decreased by $54.9 million, or 18.7%, when compared to August 3, 2019.
|
| |
• | Inventory decreased by $64.8 million, or 13.4%, to $419.4 million as of August 1, 2020, from $484.2 million at August 3, 2019. On a constant currency basis, inventory decreased by $72.6 million, or 15.0%, when compared to August 3, 2019.
|
Global Store Count
In the second quarter of fiscal 2021,2022, together with our partners, we opened six40 new stores worldwide, consisting of five26 stores in Europe and the Middle East, 11 stores in Asia and the Pacific, two stores in the U.S., and one store in Central and South America. Together with our partners, we closed 23 stores worldwide, consisting of 11 stores in Asia and the Pacific, nine stores in Europe and the Middle East and one store in Asia and the Pacific. Together with our partners, we closed 65 stores worldwide, consisting of 35 stores in Asia and the Pacific, 21three stores in the U.S., seven stores in Europe and the Middle East, one store in Canada and one store in Central and South America.
We ended the second quarter of fiscal 20212022 with 1,622 stores and 369 concessions worldwide comprised as follows:
| | | | Stores | | Concessions | | Stores | | Concessions |
Region | | Total | | Directly-Operated | | Partner Operated | | Total | | Directly-Operated | | Partner Operated | Region | | Total | | Directly-Operated | | Partner Operated | | Total | | Directly-Operated | | Partner Operated |
United States | | 259 |
| | 257 |
| | 2 |
| | 1 |
| | — |
| | 1 |
| United States | | 245 | | | 244 | | | 1 | | | 1 | | | — | | | 1 | |
Canada | | 79 |
| | 79 |
| | — |
| | — |
| | — |
| | — |
| Canada | | 74 | | | 74 | | | — | | | — | | | — | | | — | |
Central and South America | | 110 |
| | 72 |
| | 38 |
| | 27 |
| | 27 |
| | — |
| Central and South America | | 106 | | | 71 | | | 35 | | | 29 | | | 29 | | | — | |
Total Americas | | 448 |
| | 408 |
| | 40 |
| | 28 |
| | 27 |
| | 1 |
| Total Americas | | 425 | | | 389 | | | 36 | | | 30 | | | 29 | | | 1 | |
Europe and the Middle East | | 742 |
| | 515 |
| | 227 |
| | 38 |
| | 38 |
| | — |
| Europe and the Middle East | | 745 | | | 524 | | | 221 | | | 44 | | | 44 | | | — | |
Asia and the Pacific | | 432 |
| | 161 |
| | 271 |
| | 303 |
| | 115 |
| | 188 |
| Asia and the Pacific | | 427 | | | 133 | | | 294 | | | 263 | | | 91 | | | 172 | |
Total | | 1,622 |
| | 1,084 |
| | 538 |
| | 369 |
| | 180 |
| | 189 |
| Total | | 1,597 | | | 1,046 | | | 551 | | | 337 | | | 164 | | | 173 | |
Of the total 1,622 stores, 1,3371,326 were GUESS? stores, 182177 were GUESS? Accessories stores, 6459 were G by GUESS (GbG) stores and 3935 were MARCIANO stores.
Results of Operations
Three Months Ended July 31, 2021 and August 1, 2020 and August 3, 2019
Consolidated Results
The following presents our condensed consolidated statements of income (loss) (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | |
| Jul 31, 2021 | | Aug 1, 2020 | | | | | | | | |
| $ | | % | | $ | | % | | $ change | % change | | | | | |
Net revenue | $ | 628,624 | | | 100.0 | % | | $ | 398,539 | | | 100.0 | % | | $ | 230,085 | | 57.7 | % | | | | | |
Cost of product sales | 334,538 | | | 53.2 | % | | 251,511 | | | 63.1 | % | | 83,027 | | 33.0 | % | | | | | |
Gross profit | 294,086 | | | 46.8 | % | | 147,028 | | | 36.9 | % | | 147,058 | | 100.0 | % | | | | | |
| | | | | | | | | | | | | | | |
Selling, general and administrative expenses | 205,617 | | | 32.8 | % | | 150,293 | | | 37.7 | % | | 55,324 | | 36.8 | % | | | | | |
Asset impairment charges | 1,501 | | | 0.2 | % | | 11,969 | | | 3.0 | % | | (10,468) | | (87.5) | % | | | | | |
Net gains on lease modifications | (420) | | | (0.1) | % | | (885) | | | (0.2) | % | | 465 | | (52.5) | % | | | | | |
Earnings (loss) from operations | 87,388 | | | 13.9 | % | | (14,349) | | | (3.6) | % | | 101,737 | | (709.0) | % | | | | | |
Interest expense, net | (5,548) | | | (0.9) | % | | (5,505) | | | (1.4) | % | | (43) | | 0.8 | % | | | | | |
Other income (expense), net | (1,001) | | | (0.1) | % | | 5,548 | | | 1.4 | % | | (6,549) | | (118.0) | % | | | | | |
Earnings (loss) before income tax expense | 80,839 | | | 12.9 | % | | (14,306) | | | (3.6) | % | | 95,145 | | (665.1) | % | | | | | |
Income tax expense | 17,692 | | | 2.9 | % | | 6,386 | | | 1.6 | % | | 11,306 | | 177.0 | % | | | | | |
Net earnings (loss) | 63,147 | | | 10.0 | % | | (20,692) | | | (5.2) | % | | 83,839 | | (405.2) | % | | | | | |
Net earnings (loss) attributable to noncontrolling interests | 2,085 | | | (0.3) | % | | (334) | | | (0.1) | % | | 2,419 | | (724.3) | % | | | | | |
Net earnings (loss) attributable to Guess?, Inc. | $ | 61,062 | | | 9.7 | % | | $ | (20,358) | | | (5.1) | % | | 81,420 | | (399.9) | % | | | | | |
| | | | | | | | | | | | | | | |
Net earnings (loss) per common share attributable to common stockholders: | | | | | | | | |
Basic | $ | 0.94 | | | | | $ | (0.31) | | | | | $ | 1.25 | | | | | | | |
Diluted | $ | 0.91 | | | | | $ | (0.31) | | | | | $ | 1.22 | | | | | | | |
| | | | | | | | | | | | | | | |
Effective income tax rate | 21.9 | % | | | | (44.6) | % | | | | | | | | | | |
Net Revenue. Net revenue decreased by $284.7 million, or 41.7%, to $398.5 million for the quarter ended August 1, 2020, from $683.2 million for the quarter ended August 3, 2019. In constant currency, net revenue decreasedincreased by 41.2%51.1%, driven primarily by the unfavorable impact on revenue due to temporary store closures andlower comparable sales resulting from lower store traffic and temporary store closures due to a lesser extent, lower wholesale shipments resulting from lower demand as a result of the COVID-19 pandemic.pandemic in the same prior-year period. Currency translation fluctuations relating to our foreign operations unfavorablyfavorably impacted net revenue by $3.2$26.2 million compared to the same prior-year period.
Gross Margin. Gross margin decreased 200 basis points to 36.9%increased 9.9% for the quarter ended August 1, 2020, from 38.9% inJuly 31, 2021 compared to the same prior-year period, of which 410 basis points8.3% was due to a higherlower occupancy rate partially offset by 210 basis pointsand 1.6% due to higher product margins.margin mainly driven by lower markdowns, partially offset by higher freight costs. The higherlower occupancy rate was drivenresulted primarily by overall deleveraging offrom leveraging occupancy costs due mainly to lower revenue resulting fromhigher sales and the impact of the COVID-19
pandemic. The higher product margins were driven primarily by higher initial markupsprior-year temporary store closures in Europe during the quarter ended August 1, 2020, comparedAmericas Retail and, to the same prior-year period.a lesser extent, a shift in European wholesale shipments.
Gross Profit. Gross profit decreasedincreased by $118.6 million, or 44.7%, to $147.0$147.1 million for the quarter ended August 1, 2020, from $265.7 million inJuly 31, 2021 compared to the same prior-year period. The decrease in gross profit, which included the unfavorable impact of currency translation, wasperiod primarily due primarily to the unfavorablefavorable impact on gross profit from lowerhigher revenue, partially offset byas well as lower occupancy costs and, to a lesser extent, higher overall product margins.costs. Currency translation fluctuations relating to our foreign operations unfavorablyfavorably impacted gross profit by $0.4$10.6 million.
We include inbound freight charges, purchasing costs and related overhead, retail store occupancy costs, including lease 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 570 basis points to 37.7%decreased 4.9% for the quarter ended August 1, 2020, compared to 32.0% in the same prior-year period. The Company’s SG&A rate included the unfavorable impact of 60 basis pointsJuly 31, 2021 from separation charges and the favorable impact of 10 basis points from lower expenses related to certain professional service and legal fees and related costs which the Company otherwise would not have incurred as part of its business operations. Excluding these items, the SG&A rate would have increased by 520 basis points during the quarter ended August 1, 2020 compared to the same prior-year period driven primarily by overall deleveragingleveraging of expenses due mainly to lower revenue resulting fromhigher revenues in the impact ofcurrent quarter and temporary store closures in Americas Retail and Europe in the COVID-19 pandemic, partially offset by expense savings.same prior-year period.
SG&A Expenses. SG&A expenses decreasedincreased by $67.9 million, or 31.1%, to $150.3$55.3 million for the quarter ended August 1, 2020,July 31, 2021 from $218.2 millionthe same prior-year period driven primarily by higher variable expenses in the current year quarter, as well as lower payroll and overall discretionary expenses due to significant COVID-19 impacts in the same prior-year period. The decrease, which included the favorable impact of currency translation, was driven primarily by lower payroll costs and, to a lesser extent, lower overall discretionary expenses. The lower payroll costs were driven primarily by the impact of furloughs and, to a lesser extent, government assistance programs related to the recovery of employee payroll costs, temporary tiered salary reductions for management level corporate employees that have since been restored and permanent headcount reductions. Currency translation fluctuations relating to our foreign operations favorablyunfavorably impacted SG&A expenses by $1.2$8.3 million.
Asset Impairment Charges. During the quarter ended August 1, 2020, the CompanyJuly 31, 2021, we recognized $8.2 million inminimal impairment of certain operating lease right-of-use (“ROU”) assets and $3.7$1.5 million in impairment of property and equipment impairment charges related to certain retail locations compared to impairments of $8.2 million for ROU assets and $3.7 million for property and equipment during the quarter ended August 1, 2020, resulting from lower revenue and future cash flow projections from the ongoing effects of the COVID-19 pandemic. This compares to $1.5 million in impairment of property and equipment related to certain retail locations resulting from under-performance and expected store closures during the quarter ended August 3, 2019.closures. Currency translation fluctuations relating to our foreign operations unfavorably impactedhad minimal favorable impact on asset impairment charges by $0.2 million.
Net Gains on Lease Terminations. During the quarter ended August 1, 2020, the Company recorded net gains on lease terminations of $0.9 million related primarily to the early termination of certain lease agreements. There were no net gains on lease terminations during the quarter ended August 3, 2019.charges.
Operating Margin. Operating margin decreased 10.3% to negative 3.6%increased 17.5% for the quarter ended August 1, 2020, from 6.7% inJuly 31, 2021 compared to the same prior-year period ddrivenriven primarily by overall deleveragingleveraging of expenses due to the negative impact from the COVID-19 pandemic on our global operations. HigherLower asset impairment charges unfavorably
favorably impacted operating margin by 280 basis points2.8% during the quarter ended August 1, 2020July 31, 2021 compared to the same prior-year period. Separation charges unfavorably impacted operating margin by 60 basis points during the quarter ended August 1, 2020. Net gains on lease terminations favorably impacted operating margin by 20 basis points during the quarter ended August 1, 2020. Lower expenses related to certain professional service and legal fees and related costs favorably impacted operating margin by 10 basis points during the quarter ended August 1, 2020. Excluding the impact of these expenses, the Company’slower asset impairment charges, lower net gains on lease modifications and lower separation charges, our operating margin would have decreased 720 basis pointsincreased 14.3% compared to the same prior-year period. The negativepositive impact of currency on operating margin for the quarter was approximately 4030 basis points.
Earnings (Loss) from Operations. LossAs a result of our operating results, earnings from operations was $14.3increased by $101.7 million for the quarter ended August 1, 2020,July 31, 2021 compared to earningsa loss from operations of $46.0 million in the same prior-year period. Currency translation fluctuations relating to our foreign operations favorably impacted lossearnings from operations by $0.5$2.3 million.
Interest Expense, Net. Interest expense, net, was $5.5 million for the quarter ended August 1, 2020, compared to $4.6 million for the quarter ended August 3, 2019.
Other Income (Expense), Net. Other income, net, was $5.5 million for the quarter ended August 1, 2020, compared to other expense, net, of $6.4 million in the same prior-year period. The change was driven primarily by market volatility which resulted in net unrealized gains on the translation of foreign currency balances and, to a lesser extent, net unrealized gains on our SERP-related assets, compared to net unrealized losses in the same prior-year quarter. This was partially offset by net mark-to-market losses on the revaluation of foreign exchange currency contracts, compared to gains in the same prior-year quarter.period.
Income Tax Expense. Income tax expense for the quarter ended August 1, 2020July 31, 2021 was $17.7 million, or a 21.9% effective income tax rate, compared to income tax expense of $6.4 million, or a negative 44.6% effective tax rate, compared to $8.8 million, or a 25.2% effectiveincome tax rate in the same prior-year period. Generally, income taxes for the interim periods are computed using the income tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items, which is subject to ongoing review and evaluation by management. During the quarter ended August 1, 2020, the Company recorded a discrete tax expense of $7.9 million related to improved forecasts for the current fiscal year which changes the estimate of the net operating losses that the Company can carryback to tax years with a higher federal corporate tax rate as allowed under the CARES Act. Excluding this impact, the change in the effective tax rate was due primarily to a shift in the distribution of earnings among the Company’s tax jurisdictions during the quarter ended August 1, 2020, compared to the same prior-year period.
Net Earnings (Loss) Attributable to Noncontrolling Interests. Net loss attributable to noncontrolling interests was $0.3 million, net of taxes, for the quarter ended August 1, 2020, compared to netearnings attributable to noncontrolling interests of $0.9 million, net of taxes, for the quarter ended August 3, 2019.
Net Earnings (Loss) Attributable to Guess?, Inc. Net lossattributable to Guess?, Inc. was $20.4 million for the quarter ended August 1, 2020, compared to net earnings attributable to Guess?, Inc. of $25.3increased $81.4 million for the three months ended July 31, 2021 compared to a net loss attributable to Guess?, Inc. in the same prior-year period. Diluted loss per share was $0.31EPS increased $1.22 for the quarterthree months ended August 1, 2020,July 31, 2021 compared to diluted earnings per share of $0.35 in the same prior-year period.quarter. We estimate that the unfavorablea positive impact from the Company’sour share repurchases had a negative impactbuybacks and currency of $0.03 and $0.01, respectively, on diluted loss per shareEPS in the second quarter of fiscal 2022 when compared to the same prior-year
quarter.
Refer to “Non-GAAP Measures” for an overview of our non-GAAP, or adjusted, financial results for the quarterthree months ended July 31, 2021 and August 1, 2020. We also estimate that the positive impact of currency on diluted loss per share for the quarter ended August 1, 2020 was approximately $0.03 per share. During the quarter ended August 1, 2020, the Company recognized $12.0 million of asset impairment charges; $0.9 million of net gains on lease terminations; a net credit of $0.2 million of certain professional services and legal fees and related costs; $2.5 million of separation charges; $2.6 million of amortization of debt discount related to the Company’s convertible senior notes and $8.1 million in additional tax expense from certain discrete tax adjustments (or a combined $19.7 million, or $0.30 per share, negative impact after considering the related tax benefit of these adjustments of $4.4 million). Excluding the impact of these items, adjusted net loss attributable to Guess?, Inc. was $0.6 million and adjusted diluted loss was $0.01 per common share for the quarter ended August 1, 2020. We estimate that the unfavorable impact from the Company’s share repurchases had a minimal impact on adjusted diluted loss per share for the quarter ended
August 1, 2020. During the quarter ended August 3, 2019, the Company recognized $1.5 million of asset impairment charges; $0.4 million of certain professional services and legal fees and related costs and $2.4 million of amortization of debt discount related to the Company’s convertible senior notes (or a combined $2.1 million, or $0.03 per share, negative impact after considering the related tax benefit of these adjustments and adjustments to uncertain tax positions excluded from results in prior years totaling $2.3 million). Excluding the impact of thesenon-GAAP items, adjusted net earnings attributable to Guess?, Inc. were $27.4increased $64.7 million and adjusted diluted earnings were $0.38 per common shareEPS increased $0.97 for the quarterthree months ended August 3, 2019. ReferencesJuly 31, 2021 compared to financial results excludingan adjusted net loss attributable to Guess?, Inc and adjusted diluted loss per share in the same prior-year quarter. We estimate our share buybacks had a positive impact of these items are non-GAAP measures$0.03 and are addressed below under “Non-GAAP Measures.”currency had a minimal impact on adjusted diluted EPS in the second quarter of fiscal 2022 when compared to the same prior-year quarter.
Information by Business Segment
The following table presents our net revenue and earnings (loss) from operations by segment for the three months ended August 1, 2020 and August 3, 2019 (dollars in(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| Jul 31, 2021 | | Aug 1, 2020 | | $ change | | % change |
Net revenue: | | | | | | | |
Americas Retail | $ | 186,297 | | | $ | 110,065 | | | $ | 76,232 | | | 69.3 | % |
Americas Wholesale | 49,858 | | | 20,285 | | | 29,573 | | | 145.8 | % |
Europe | 322,723 | | | 205,851 | | | 116,872 | | | 56.8 | % |
Asia | 47,813 | | | 50,191 | | | (2,378) | | | (4.7 | %) |
Licensing | 21,933 | | | 12,147 | | | 9,786 | | | 80.6 | % |
Total net revenue | $ | 628,624 | | | $ | 398,539 | | | 230,085 | | | 57.7 | % |
Earnings (loss) from operations: | | | | | | | |
Americas Retail | $ | 37,916 | | | $ | (4,704) | | | 42,620 | | | (906.0 | %) |
Americas Wholesale | 12,944 | | | 1,688 | | | 11,256 | | | 666.8 | % |
Europe | 51,417 | | | 20,795 | | | 30,622 | | | 147.3 | % |
Asia | (4,847) | | | (3,367) | | | (1,480) | | | 44.0 | % |
Licensing | 20,154 | | | 11,511 | | | 8,643 | | | 75.1 | % |
Total segment earnings from operations | 117,584 | | | 25,923 | | | 91,661 | | | 353.6 | % |
Corporate overhead | (29,115) | | | (29,188) | | | 73 | | | (0.3 | %) |
| | | | | | | |
Asset impairment charges | (1,501) | | | (11,969) | | | 10,468 | | | (87.4 | %) |
Net gains on lease modifications | 420 | | | 885 | | | (465) | | | (52.5 | %) |
Total earnings (loss) from operations | $ | 87,388 | | | $ | (14,349) | | | 101,737 | | | (709.0 | %) |
| | | | | | | |
Operating margins: | | | | | | | |
Americas Retail | 20.4 | % | | (4.3 | %) | | | | |
Americas Wholesale | 26.0 | % | | 8.3 | % | | | | |
Europe | 15.9 | % | | 10.1 | % | | | | |
Asia | (10.1 | %) | | (6.7 | %) | | | | |
Licensing | 91.9 | % | | 94.8 | % | | | | |
Total Company | 13.9 | % | | (3.6 | %) | | | | |
|
| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| Aug 1, 2020 | | Aug 3, 2019 | | $ Change | | % Change |
Net revenue: | | | | | | | |
Americas Retail | $ | 110,065 |
| | $ | 198,966 |
| | $ | (88,901 | ) | | (44.7 | %) |
Americas Wholesale | 20,285 |
| | 41,902 |
| | (21,617 | ) | | (51.6 | %) |
Europe | 205,851 |
| | 340,509 |
| | (134,658 | ) | | (39.5 | %) |
Asia | 50,191 |
| | 83,301 |
| | (33,110 | ) | | (39.7 | %) |
Licensing | 12,147 |
| | 18,542 |
| | (6,395 | ) | | (34.5 | %) |
Total net revenue | $ | 398,539 |
| | $ | 683,220 |
| | $ | (284,681 | ) | | (41.7 | %) |
Earnings (loss) from operations: | | | | | | | |
Americas Retail | $ | (4,704 | ) | | $ | 5,957 |
| | $ | (10,661 | ) | | (179.0 | %) |
Americas Wholesale | 1,688 |
| | 8,422 |
| | (6,734 | ) | | (80.0 | %) |
Europe | 20,795 |
| | 51,594 |
| | (30,799 | ) | | (59.7 | %) |
Asia | (3,367 | ) | | (4,800 | ) | | 1,433 |
| | 29.9 | % |
Licensing | 11,511 |
| | 15,547 |
| | (4,036 | ) | | (26.0 | %) |
Total segment earnings from operations | 25,923 |
| | 76,720 |
| | (50,797 | ) | | (66.2 | %) |
Corporate overhead | (29,188 | ) | | (29,229 | ) | | 41 |
| | (0.1 | %) |
Asset impairment charges | (11,969 | ) | | (1,504 | ) | | (10,465 | ) | | 695.8 | % |
Net gains on lease terminations | 885 |
| | — |
| | 885 |
| |
|
|
Total earnings (loss) from operations | $ | (14,349 | ) | | $ | 45,987 |
| | $ | (60,336 | ) | | (131.2 | %) |
| | | | | | | |
Operating margins: | | | | | | | |
Americas Retail | (4.3 | %) | | 3.0 | % | | | | |
Americas Wholesale | 8.3 | % | | 20.1 | % | | | | |
Europe | 10.1 | % | | 15.2 | % | | | | |
Asia | (6.7 | %) | | (5.8 | %) | | | | |
Licensing | 94.8 | % | | 83.8 | % | | | | |
Total Company | (3.6 | %) | | 6.7 | % | | | | |
Americas Retail
Net revenue from our Americas Retail segment decreasedincreased by $88.9 million, or 44.7%, to $110.1$76.2 million for the quarter ended August 1, 2020,July 31, 2021 from $199.0 million in the same prior-year period. In constant currency, net revenue decreasedincreased by 44.1%,66.1% due primarily to higher comparable sales driven primarily by lower store traffic and temporary store closures and, to a lesser extent, lower store traffic resulting from the COVID-19 pandemic.pandemic in the same prior-year period. Excluding the impact from the temporary store closures, the store base for the U.S. and Canada decreased by an average of 2231 net stores during the quarter ended August 1, 2020July 31, 2021 compared to the same prior-year period, resulting in a 3.9%6.6% 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 $1.2$3.4 million.
Operating margin decreased 730 basis points to negative 4.3%increased 24.7% for the quarter ended August 1, 2020,July 31, 2021 from 3.0% in the same prior-year quarter due to lower gross margins, partially offset by a lower SG&A rate. The lower
gross margins were driven primarily by overall deleveragingleveraging of occupancy costs due primarily to the negative impact from temporary store closures andexpenses as well as lower store traffic. The lower SG&A rate was driven primarily by lower store selling expenses due to payroll savings resulting from the temporary furloughmarkdowns.
LossEarnings from operations from our Americas Retail segment was $4.7increased by $42.6 million for the quarter ended August 1, 2020, compared to earningsJuly 31, 2021 from operations of $6.0 million in the same prior-year period. The deterioration isperiod due primarily due to the unfavorablefavorable impact on earnings from lowerhigher revenue partially offset by lower store selling expenses and lower occupancy costs.leveraging of expenses.
Americas Wholesale
Net revenue from our Americas Wholesale segment decreasedincreased by $21.6 million, or 51.6%, to $20.3$29.6 million for the quarter ended August 1, 2020,July 31, 2021 from $41.9 million in the same prior-year period. In constant currency, net revenue decreasedincreased by 48.7%137.3%, driven primarily by increased demand in our U.S. wholesale business due mainly to lower demand resulting from the COVID-19 pandemic.business. Currency translation fluctuations relating to our non-U.S. wholesale businesses unfavorablyfavorably impacted net revenue by $1.2$1.7 million.
Operating margin decreased 11.8% to 8.3%increased 17.7% for the quarter ended August 1, 2020, from 20.1% inJuly 31, 2021 compared to the same prior-year quarter due primarilymainly to a higher SG&A rate driven primarily by overall deleveragingleveraging of expenses resulting fromand lower wholesale shipments.markdowns.
Earnings from operations from our Americas Wholesale segment decreasedincreased by $6.7 million, or 80.0%, to $1.7$11.3 million for the quarter ended August 1, 2020,July 31, 2021 from $8.4 million in the same prior-year period. The decreaseincrease reflects the unfavorablefavorable impact on earnings from lowerhigher revenue.
Europe
Net revenue from our Europe segment decreasedincreased by $134.7 million, or 39.5%, to $205.9$116.9 million for the quarter ended August 1, 2020, from $340.5 million inJuly 31, 2021 compared to the same prior-year period. In constant currency, net revenue decreasedincreased by 39.6%,47.8% driven primarily by lowera shift in wholesale shipments resulting from lower demand and to a lesser extent, lower store traffic and temporary store closures resulting from the COVID-19 pandemic.increased demand. As of August 1, 2020,July 31, 2021, we directly operated 515524 stores in Europe compared to 510515 stores at August 3, 2019,1, 2020, excluding concessions, which represents a 1.0%1.7% increase over the same prior-year period. Currency translation fluctuations relating to our EuropeanEuropean operations favorably impacted net revenue by $0.1$18.4 million.
Operating margin decreased 510 basis points to 10.1%increased 5.8% for the quarter ended August 1, 2020, from 15.2% inJuly 31, 2021 compared to the same prior-year quarter. The decrease wasquarter driven mainly by a higher SG&A rate due primarily to overall deleveragingleveraging of expenses resulting from lower revenue. Gross margins were relatively flat as the unfavorable impact from overall deleveraging of occupancy costs was mostly offset by the favorable impact from certain rent concessions granted related to the COVID-19 pandemic and,due to a lesser extent, higher initial markups.shift in wholesale shipments and increased demand.
Earnings from operations from our Europe segment decreasedincreased by $30.8 million, or 59.7%, to $20.8$30.6 million for the quarter ended August 1, 2020, from $51.6 million inJuly 31, 2021 compared to the same prior-year period driven primarily by the unfavorablefavorable impact on earnings from lowerhigher revenue partially offset by lower SG&A expenses and to a lesser extent, lower occupancy costs.overall leveraging of expenses. Currency translation fluctuations relating to our EuropeanEuropean operations favorably impacted earnings from operations by $0.8$1.6 million.
Asia
Net revenue from our Asia segment decreased by $33.1 million, or 39.7%, to $50.2$2.4 million for the quarter ended August 1, 2020,July 31, 2021 from $83.3 million in the same prior-year period. In constant currency, net revenue decreased by 38.7%10.1%, due primarily to lower wholesale revenues and lower comparable sales driven by reduced store traffic resulting from the COVID-19 pandemic. Currency translation fluctuations relating to our Asian operations favorably impacted net revenue by $2.7 million.
Operating margin decreased 3.4% for the quarter ended July 31, 2021 from the same prior-year quarter driven primarily by the deleveraging of expenses due to lower revenue.
Loss from operations from our Asia segment was $4.8 million for the quarter ended July 31, 2021, compared to loss from operations of $3.4 million in the same prior-year period. The deterioration was driven primarily by the unfavorable impact from lower revenue. Currency translation fluctuations relating to our Asia operations unfavorably impacted loss from operations by $0.2 million.
Licensing
Net royalty revenue from our Licensing segment increased by $9.8 million for the quarter ended July 31, 2021 from the same prior-year period due primarily to higher demand and strong performance in footwear, handbags, eyewear, and watches.
Earnings from operations from our Licensing segment increased by $8.6 million for the quarter ended July 31, 2021 from the same prior-year period mainly due to leveraging of expenses.
Corporate Overhead
Unallocated corporate overhead decreased by $0.1 million for the quarter ended July 31, 2021 compared to the same prior-year period.
Six months endedJuly 31, 2021 and August 1, 2020
Consolidated Results
The following presents our condensed consolidated statements of income (loss) (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | |
| Jul 31, 2021 | | Aug 1, 2020 | | | |
| $ | | % | | $ | | % | | $ change | % change |
Net revenue | $ | 1,148,626 | | | 100.0 | % | | $ | 658,790 | | | 100.0 | % | | $ | 489,836 | | 74.4 | % |
Cost of product sales | 642,982 | | | 56.0 | % | | 477,533 | | | 72.5 | % | | 165,449 | | 34.6 | % |
Gross profit | 505,644 | | | 44.0 | % | | 181,257 | | | 27.5 | % | | 324,387 | | 179.0 | % |
| | | | | | | | | | |
Selling, general and administrative expenses | 392,301 | | | 34.1 | % | | 293,581 | | | 44.5 | % | | 98,720 | | 33.6 | % |
Asset impairment charges | 1,942 | | | 0.2 | % | | 64,941 | | | 9.9 | % | | (62,999) | | (97.0) | % |
Net gains on lease modifications | (2,565) | | | (0.2) | % | | (429) | | | (0.1) | % | | (2,136) | | 497.9 | % |
Earnings (loss) from operations | 113,966 | | | 9.9 | % | | (176,836) | | | (26.8 | %) | | 290,802 | | (164.4) | % |
Interest expense, net | (11,100) | | | (1.0) | % | | (10,357) | | | (1.5) | % | | (743) | | 7.2 | % |
Other expense, net | (3,702) | | | (0.4) | % | | (14,032) | | | (2.2) | % | | 10,330 | | (73.6) | % |
Earnings (loss) before income tax expense (benefit) | 99,164 | | | 8.6 | % | | (201,225) | | | (30.5) | % | | 300,389 | | (149.3) | % |
Income tax expense (benefit) | 23,147 | | | 2.0 | % | | (19,995) | | | (3.0) | % | | 43,142 | | (215.8) | % |
Net earnings (loss) | 76,017 | | | 6.6 | % | | (181,230) | | | (27.5) | % | | 257,247 | | (141.9) | % |
Net earnings (loss) attributable to noncontrolling interests | 2,949 | | | 0.2 | % | | (3,206) | | | (0.5) | % | | 6,155 | | (192.0) | % |
Net earnings (loss) attributable to Guess?, Inc. | $ | 73,068 | | | 6.4 | % | | $ | (178,024) | | | (27.0) | % | | 251,092 | | (141.0) | % |
| | | | | | | | | | |
Net earnings (loss) per common share attributable to common stockholders: | | | |
Basic | $ | 1.13 | | | | | $ | (2.72) | | | | | $ | 3.85 | | |
Diluted | $ | 1.10 | | | | | $ | (2.72) | | | | | $ | 3.82 | | |
| | | | | | | | | | |
Effective income tax rate | 23.3 | % | | | | 9.9 | % | | | | | |
Net Revenue. In constant currency, net revenue increased by 66.6% driven primarily by lower comparable sales due to reduced store traffic and temporary store closures resulting from the COVID-19 pandemic. As of August 1, 2020, we and our partners operated 432 stores and 303 concessions in Asia, compared to 520 stores and 337 concessions at August 3, 2019. As of August 1, 2020, we directly operated 161 stores and 115 concessions in Asia, compared to 216 directly-operated stores and 162 concessions at August 3, 2019. Currency translation fluctuations relating to our Asian operations unfavorably impacted net revenue by $0.8 million.
Operating margin decreased 90 basis points to negative 6.7% for the quarter ended August 1, 2020, from negative 5.8%pandemic in the same prior-year quarter, driven primarily by a higher SG&A rate. The higher SG&A rate was driven primarily by overall deleveraging of expenses, partially offset by the favorable impact from business mix.
Loss from operations from our Asia segment improved by $1.4 million, or 29.9%, to $3.4 million for the quarter ended August 1, 2020, compared to $4.8 million in the same prior-year period. The improvement was driven primarily by the favorable impact on earnings from lower SG&A expensesperiod and, to a lesser extent, lower occupancy costs, partially offset by the unfavorable impact from lower revenue.
Licensing
Net royalty revenue from our Licensing segment decreased by $6.4 million, or 34.5%, to $12.1 million for the quarter ended August 1, 2020, from $18.5 milliona shift in the same prior-year period, due primarily to lower demand resulting from the COVID-19 pandemic.
Earnings from operations from our Licensing segment decreased by $4.0 million, or 26.0%, to $11.5 million for the quarter ended August 1, 2020, from $15.5 million in the same prior-year period. The decrease was driven by the unfavorable impact to earnings from lower revenue.
Corporate Overhead
Unallocated corporate overhead was relatively flat at $29.2 million for the quarter ended August 1, 2020, compared to the same prior-year period.
Six Months Ended August 1, 2020 and August 3, 2019
Consolidated Results
Net Revenue. Net revenue decreased by $561.1 million, or 46.0%, to $658.8 million for the six months ended August 1, 2020, compared to $1.22 billion for the six months ended August 3, 2019. In constant currency, net revenue decreased by 45.1%, driven primarily by the unfavorable impact on revenue due to temporary store closures and lower store traffic and, to a lesser extent, lowerEuropean wholesale shipments resulting from lower demand as a result of the COVID-19 pandemic.into fiscal 2022. Currency translation fluctuations relating to our foreign operations unfavorablyfavorably impacted net revenue by $10.6$51.1 million, compared to the same prior-year period.
Gross Margin. Gross margin decreased 920 basis points to 27.5%increased 16.5% for the six months ended August 1, 2020,July 31, 2021 compared to 36.7% in the same prior-year period, of which 800 basis points13.1% was due to a lower occupancy rate from overall leveraging of expenses and 120 basis pointsto a lesser extent, a shift in European wholesale shipments into fiscal 2022 and 3.4% was due to lowerhigher product margins. The higher occupancy rate was driven primarily by overall deleveraging
margin resulting from the impact of the COVID-19 pandemic. The lower product margins were driven primarily by highersignificant inventory reserves duringin Asia included in the six months ended August 1, 2020, compared toprior-year period and lower markdowns in the same prior-yearAmericas and Europe in the current-year period.
Gross Profit. Gross profit decreasedincreased by $266.4 million, or 59.5%, to $181.3$324.4 million for the six months ended August 1, 2020, from $447.6 million inJuly 31, 2021 compared to the same prior-year period. period primarily dueThe decrease in gross profit, which included the unfavorable impact of currency translation, was due primarily to the unfavorablefavorable impact on gross profit from lowerhigher revenue, partially offset byas well as lower occupancy costs. Currency translation fluctuations relating to our foreign operations unfavorablyfavorably impacted gross profit by $1.4$18.7 million.
SG&A Rate. The Company’sOur SG&A rate increased 990 basis points to 44.5%decreased 10.4% for the six months ended August 1, 2020, compared to 34.6% inJuly 31, 2021 from the same prior-year period. The Company’sOur SG&A rate included the favorable impact of lower separation charges and the unfavorable impact of 40 basis points from separation charges.higher certain professional service and legal fees and related (credits) costs which we otherwise would not have incurred as part of our business operations. Excluding these charges, the Company’sitems, our SG&A rate would have increaseddecreased by 950 basis points10.1% during the six months ended August 1, 2020July 31, 2021 compared to the same prior-year period, driven by overall deleveragingleveraging of expenses due mainly to lower revenue resulting from the impact of the COVID-19 pandemic, partially offset by expense savings.higher revenue.
SG&A Expenses. SG&A expenses decreasedincreased by $129.2 million, or 30.6%, to $293.6$98.7 million for the six months ended August 1, 2020,July 31, 2021 from $422.8 millionthe same prior-year period driven primarily by higher variable expenses in the current year quarter, as well as lower payroll and overall discretionary expenses due to significant COVID-19 impacts in the same prior-year period. The decrease, which included the favorable impact of currency translation, was driven primarily by lower payroll costs and, to a lesser extent, lower
overall discretionary expenses.The lower payroll costs were driven primarily by the impact of furloughs and, to a lesser extent, government assistance programs related to the recovery of employee payroll costs, temporary tiered salary reductions for management level corporate employees that have since been restored and permanent headcount reductions. Currency translation fluctuations relating to our foreign operations favorablyunfavorably impacted SG&A expenses by $4.8$17.3 million.
Asset Impairment Charges. During the six months ended August 1, 2020, the CompanyJuly 31, 2021, we recognized $36.5 million inminimal impairment charges of certain operating lease right-of-useROU assets and $28.5$1.9 million in impairment offor 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. and expected store closures. This compares to $3.3$36.5 million in impairment of certain ROU assets and $28.5 million for property and equipment and related to certain retail locations resulting from under-performance and expected store closures during the six months ended August 3, 2019.1, 2020. Currency translation fluctuations relating to our foreign operations favorably impacted asset impairment charges by $1.6$0.1 million.
Net Gains on Lease Terminations.Modifications. During the six months ended July 31, 2021 and August 1, 2020, the Companywe recorded net gains on lease terminationsmodifications of $2.6 million and $0.4 million, respectively, related primarily to the early termination of lease agreements for certain lease agreements. There were no net gains on lease terminations recorded during the six months ended August 3, 2019.of our retail locations.
Operating Margin. Operating margin decreased 28.6% to negative 26.8%increased 36.7% for the six months ended August 1, 2020,July 31, 2021 compared to1.8% in the same prior-year period driven primarily by overall deleveragingleveraging of expenses due to the negative impact from the COVID-19 pandemic on our global operations and higher asset impairment charges. Higherexpenses. Lower asset impairment charges negativelyfavorably impacted operating margin by 960 basis points9.7% during the six months ended August 1, 2020July 31, 2021 compared to the same prior-year period. Separation charges unfavorably impacted operating margin by 40 basis points during the six months ended August 1, 2020. Net gains on lease terminations favorably impacted operating margin by 10 basis points during the six months ended August 1, 2020. Excluding the impact of these items, the Company’sour operating margin would have decreased 18.7%26.6% compared to the same prior-year period. The negative impact of currency on operating margin was minimal for the first six months of fiscal 2021 was approximately 10 basis points.2022.
Earnings (Loss) from Operations. LossAs a result of our operating results, earnings from operations was $176.8increased by $290.8 million for the six months ended August 1, 2020,July 31, 2021 compared to earningsa loss from operations of $21.5 million in the same prior-year period. Currency translation fluctuations relating to our foreign operations favorably impacted earningsloss from operations by $5.1$1.6 million.
Interest Expense, Net. Interest expense, net, was $10.4 million for the six months ended August 1, 2020, compared to $5.5 million for the six months ended August 3, 2019. The increase in interest expense was due primarily to higher amortization of debt discount and higher interest expense related to the Company’s convertible senior notes during the six months ended August 1, 2020.
Other Expense, Net. Other expense, net was $14.0decreased $10.3 million for the six months ended August 1, 2020,July 31, 2021 compared to $4.3 million in the same prior-year period. The change was dueperiod driven primarily to net mark-to-market losses on revaluation of foreign exchange currency contracts, compared to gains in the same prior-year period. During the first six months of fiscal 2021,by market volatility alsowhich resulted in higherlower net unrealized losses on the translation of foreign currency balances andlowercompared to higher net unrealized gains on our SERP-related assets, compared tolosses in the same prior-year period.period.
Income Tax Expense (Benefit). Income tax benefitexpense for the six months ended August 1, 2020July 31, 2021 was $23.1 million, or a 23.3% effective income tax rate, compared to income tax benefit of $20.0 million, or a 9.9% effective tax rate, compared to income tax expense of $6.1 million, or a 52.2% effective tax rate, in the same prior-year period. Generally, income taxes for the interim periods are computed using the income tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items, which is subject to ongoing review and evaluation by management. During the six months ended August 1, 2020, the Company recognized a tax benefit
Table of approximately $3.9 million 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. This benefit was mostly offset by a valuation allowance of $3.7 million resulting from jurisdictions where there haveContents
been cumulative net operating losses, limiting the Company’s ability to consider other subjective evidence to continue to recognize the existing deferred tax assets. Excluding the impact of these items, the change in the effective tax rate was due primarily to a shift in the distribution of earnings among the Company’s tax jurisdictions during the six months ended August 1, 2020, compared to the same prior-year period.
Net Earnings (Loss) Attributable to Noncontrolling Interests. Net loss attributable to noncontrolling interests was $3.2 million, net of taxes, for the six months ended August 1, 2020, compared to net earnings attributable to noncontrolling interests of $1.6 million, net of taxes, for the six months ended August 3, 2019.
Net Earnings (Loss) Attributable to Guess?, Inc. Net lossearnings attributable to Guess?, Inc. was $178.0increased $251.1 million for the six months ended August 1, 2020,July 31, 2021 compared to a net earningsloss attributable to Guess?, Inc. of $3.9 million in the same prior-year period. Diluted loss per share was $2.72EPS increased $3.82 for the six months ended August 1, 2020,July 31, 2021 compared to diluted earnings per share of $0.05 in the same prior-year period. We estimate that the unfavorablea net positive impact from the Company’sour share repurchasesbuybacks and additional interest expense recognized related to the offeringprior year convertible notes transaction and currency of convertible senior notes had a net negative impact$0.05 and $0.10, respectively, on diluted loss per share of $0.45EPS for the six months ended August 1, 2020. We also estimate thatJuly 31, 2021 when compared to the negative impactsame prior-year period.
Refer to “Non-GAAP Measures” for an overview of currency on diluted loss per shareour non-GAAP, or adjusted, financial results for the six months ended July 31, 2021 and August 1, 2020 was approximately $0.06 per share. During the six months ended August 1, 2020, the Company recognized $64.9 million of asset impairment charges; $0.4 million of net gains on lease terminations; $0.1 million of certain professional services and legal fees and related costs; $2.7 million of separation charges; $5.2 million of amortization of debt discount related to the Company’s convertible senior notes; and $0.2 million in additional tax expense from certain discrete tax adjustments (or a combined $58.5 million, or $0.89 per share, negative impact after considering the related tax benefit of these adjustments of $14.2 million).2020. Excluding the impact of these items, adjusted net loss attributable to Guess?, Inc. was $119.6 million and adjusted diluted loss was $1.83 per common share during the six months ended August 1, 2020. We estimate that the unfavorable impact from share repurchases and additional interest expense recognized related to the offering of convertible senior notes had a net negative impact of $0.29 on adjusted diluted loss per share for the six months ended August 1, 2020. During the six months ended August 3, 2019, the Company recognized $3.3 million of asset impairment charges; $0.7 million of certain professional services and legal fees and related costs; and $2.7 million of amortization of debt discount related to the Company’s convertible senior notes (or a combined $3.9 million, or $0.05 per share, negative impact after considering the related tax benefit of these adjustments and adjustments to uncertain tax positions excluded from results in prior years totaling $2.8 million). Excluding the impact of thesenon-GAAP items, adjusted net earnings attributable to Guess?, Inc. were $7.8increased $197.5 million and adjusted diluted earningsEPS increased $3.00 for the six months ended July 31, 2021 compared to an adjusted net loss attributable to Guess?, Inc and adjusted diluted loss per share were $0.10 per commonin the same prior-year period. We estimate our share buybacks and prior year convertible notes transaction and currency had a net positive impact of $0.05 and $0.09, respectively, on adjusted diluted EPS during the six months ended August 3, 2019. ReferencesJuly 31, 2021 when compared to financial results excluding the impact of these items are non-GAAP measures and are addressed below under “Non-GAAP Measures.”
same prior-year period.
Information by Business Segment
The following table presents our net revenue and earnings (loss) from operations by segment for the six months ended August 1, 2020 and August 3, 2019 (dollars in(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| Jul 31, 2021 | | Aug 1, 2020 | | $ change | | % change |
| | | |
Net revenue: | | | | | | | |
Americas Retail | $ | 341,832 | | | $ | 184,649 | | | $ | 157,183 | | | 85.1 | % |
Americas Wholesale | 95,288 | | | 46,160 | | | 49,128 | | | 106.4 | % |
Europe | 564,575 | | | 312,324 | | | 252,251 | | | 80.8 | % |
Asia | 103,473 | | | 90,576 | | | 12,897 | | | 14.2 | % |
Licensing | 43,458 | | | 25,081 | | | 18,377 | | | 73.3 | % |
Total net revenue | $ | 1,148,626 | | | $ | 658,790 | | | 489,836 | | | 74.4 | % |
Earnings (loss) from operations: | | | | | | | |
Americas Retail | $ | 58,190 | | | $ | (41,377) | | | 99,567 | | | (240.6 | %) |
Americas Wholesale | 24,499 | | | 3,312 | | | 21,187 | | | 639.7 | % |
Europe | 55,615 | | | (23,611) | | | 79,226 | | | (335.5 | %) |
Asia | (6,655) | | | (26,144) | | | 19,489 | | | 74.5 | % |
Licensing | 39,585 | | | 21,605 | | | 17,980 | | | 83.2 | % |
Total segment earnings (loss) from operations | 171,234 | | | (66,215) | | | 237,449 | | | (358.6 | %) |
Corporate overhead | (57,891) | | | (46,109) | | | (11,782) | | | 25.6 | % |
| | | | | | | |
Asset impairment charges | (1,942) | | | (64,941) | | | 62,999 | | | (97.0 | %) |
| | | | | | | |
Net gains on lease modifications | 2,565 | | | 429 | | | 2,136 | | | 497.9 | % |
| | | | | | | |
Total earnings (loss) from operations | $ | 113,966 | | | $ | (176,836) | | | 290,802 | | | (164.4 | %) |
Operating margins: | | | | | | | |
Americas Retail | 17.0 | % | | (22.4 | %) | | | | |
Americas Wholesale | 25.7 | % | | 7.2 | % | | | | |
Europe | 9.9 | % | | (7.6 | %) | | | | |
Asia | (6.4 | %) | | (28.9 | %) | | | | |
Licensing | 91.1 | % | | 86.1 | % | | | | |
Total Company | 9.9 | % | | (26.8 | %) | | | | |
|
| | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| Aug 1, 2020 | | Aug 3, 2019 | | $ Change | | % Change |
Net revenue: | | | | | | | |
Americas Retail | $ | 184,649 |
| | $ | 375,389 |
| | $ | (190,740 | ) | | (50.8 | %) |
Americas Wholesale | 46,160 |
| | 88,107 |
| | (41,947 | ) | | (47.6 | %) |
Europe | 312,324 |
| | 550,564 |
| | (238,240 | ) | | (43.3 | %) |
Asia | 90,576 |
| | 168,491 |
| | (77,915 | ) | | (46.2 | %) |
Licensing | 25,081 |
| | 37,360 |
| | (12,279 | ) | | (32.9 | %) |
Total net revenue | $ | 658,790 |
| | $ | 1,219,911 |
| | $ | (561,121 | ) | | (46.0 | %) |
Earnings (loss) from operations: | | | | | | | |
Americas Retail | $ | (41,377 | ) | | $ | 4,145 |
| | $ | (45,522 | ) | | (1,098.2 | %) |
Americas Wholesale | 3,312 |
| | 16,236 |
| | (12,924 | ) | | (79.6 | %) |
Europe | (23,611 | ) | | 35,267 |
| | (58,878 | ) | | (166.9 | %) |
Asia | (26,144 | ) | | (8,003 | ) | | (18,141 | ) | | (226.7 | %) |
Licensing | 21,605 |
| | 32,191 |
| | (10,586 | ) | | (32.9 | %) |
Total segment earnings (loss) from operations | (66,215 | ) | | 79,836 |
| | (146,051 | ) | | (182.9 | %) |
Corporate overhead | (46,109 | ) | | (55,041 | ) | | 8,932 |
| | (16.2 | %) |
Asset impairment charges | (64,941 | ) | | (3,279 | ) | | (61,662 | ) | | 1,880.5 | % |
Net gains on lease terminations | 429 |
| | — |
| | 429 |
| |
|
|
Total earnings (loss) from operations | $ | (176,836 | ) | | $ | 21,516 |
| | $ | (198,352 | ) | | (921.9 | %) |
Operating margins: | | | | | | | |
Americas Retail | (22.4 | %) | | 1.1 | % | | | | |
Americas Wholesale | 7.2 | % | | 18.4 | % | | | | |
Europe | (7.6 | %) | | 6.4 | % | | | | |
Asia | (28.9 | %) | | (4.7 | %) | | | | |
Licensing | 86.1 | % | | 86.2 | % | | | | |
Total Company | (26.8 | %) | | 1.8 | % | | | | |
Americas Retail
Net revenue from our Americas Retail segment decreasedincreased by $190.7 million, or 50.8%, to $184.6$157.2 million for the six months ended August 1, 2020,July 31, 2021 compared to $375.4 million in the same prior-year period. In constant currency, net revenue decreasedincreased by 50.3%,82.2% due primarily to lower comparable sales driven primarily by reduced store traffic and temporary store closures and, to a lesser extent, lower store traffic resulting from the COVID-19 pandemic.pandemic in the same prior-year period. Excluding the impact from the temporary store closures, the store base for the U.S. and Canada decreased by an average of 2133 net stores during the six months ended August 1, 2020July 31, 2021 compared to the same prior-year period, resulting in a 3.4%7.0% 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 $1.7$5.4 million.
Operating margin decreased 23.5% to negative 22.4%increased 39.4% for the six months ended August 1, 2020,July 31, 2021 compared to 1.1% in the same prior-year period due to lower gross margins and, to a lesser extent, a higher SG&A rate. The lower gross margins were driven primarily by overall deleveraging of occupancy costs due primarily to the negative impact from temporary store closures and lower store traffic. The higher SG&A rate was driven primarily by overall deleveragingleveraging of expenses partially offset byas well as lower store selling expenses due to payroll savings resulting from the temporary furlough of the Company’s store associates in the U.S. and Canada.markdowns.
LossEarnings from operations from our Americas Retail segment was $41.4increased $99.6 million for the six months ended August 1, 2020,July 31, 2021 compared to earnings from operations of $4.1 million in the same prior-year period. The deterioration isperiod primarily due to the unfavorablefavorable impact on earnings from lowerhigher revenue partially offset by lower store selling expenses and lower occupancy costs.leveraging of expenses.
Americas Wholesale
Net revenue from our Americas Wholesale segment decreasedincreased by $41.9 million, or 47.6%, to $46.2$49.1 million for the six months ended August 1, 2020, compared to $88.1 million inJuly 31, 2021 from the same prior-year period. In constant currency, net revenue decreasedincreased by 45.1%100.1%, driven primarily by our U.S. wholesale business due mainly to lower demand resulting from the COVID-19 pandemic.higher demand. Currency translation fluctuations relating to our non-U.S. wholesale businesses unfavorablyfavorably impacted net revenue by $2.3$2.9 million.
Operating margin decreased 11.2% to 7.2%increased 18.5% for the six months ended August 1, 2020, compared to 18.4% inJuly 31, 2021 from the same prior-year period due to a higher SG&A rate and, to a lesser extent, lower gross margins. The higher SG&A rate was due primarily to overall deleveragingleveraging of expenses resulting fromand lower wholesale shipments. The lower gross margins were driven primarily by the negative impacts from the COVID-19 pandemic which resulted in higher markdowns.
Earnings from operations from our Americas Wholesale segment decreasedincreased by $12.9 million, or 79.6%, to $3.3$21.2 million for the six months ended August 1, 2020, compared to $16.2 million inJuly 31, 2021 from the same prior-year period. The decreaseperiod, which reflects the unfavorablefavorable impact on earnings from lowerhigher revenue.
Europe
Net revenue from our Europe segment decreasedincreased by $238.2 million, or 43.3%, to $312.3$252.3 million for the six months ended August 1, 2020,July 31, 2021 from $550.6 million in the same prior-year period. In constant currency, net revenue decreasedincreased by 42.5%69.1%, driven primarily by temporary store closures and lower store traffic resulting from the COVID-19 pandemic and, to a lesser extent, lowershift in wholesale shipments resulting from lowerinto fiscal 2022 and increased demand. Currency translation fluctuations relating to our EuropeanEuropean operations unfavorablyfavorably impacted net revenue by $4.0$36.6 million.
Operating margin decreased 14.0% to negative 7.6%increased 17.5% for the six months ended August 1, 2020,July 31, 2021 from 6.4% in the same prior-year period, driven by a higher SG&A rate and,overall leveraging of expenses due to a lesser extent, lower gross margins due primarily to overall deleveraging of expenses resulting from lower revenue.shift in wholesale shipments and increased demand.
LossEarnings from operations from our Europe segment was $23.6increased by $79.2 million for the six months ended August 1, 2020,July 31, 2021 compared to earnings from operations of $35.3 million in the same prior-year period. The deterioration wasperiod driven primarily by the unfavorablefavorable impact on earnings from lowerhigher revenue partially offset by lower SG&A expenses and to a lesser extent, lower occupancy costs.overall leveraging of expenses. Currency translation fluctuations relating to our EuropeanEuropean operations favorably impacted lossearnings from operations by $2.3$0.2 million.
Asia
Net revenue from our Asia segment decreasedincreased by $77.9 million, or 46.2%, to $90.6$12.9 million for the six months ended August 1, 2020,July 31, 2021 compared to $168.5 million in the same prior-year period. In constant currency, net revenue decreasedincreased by 44.7%,6.8% due primarily to lower comparable sales driven primarily by lowerreduced store traffic and temporary store closures resulting from the COVID-19 pandemic.pandemic in the same prior-year period. Currency translation fluctuations relating to our AsianAsian operations unfavorablyfavorably impacted net revenue by $2.5$6.1 million.
Operating margin decreased 24.2% to negative 28.9%improved 22.5% for the six months ended August 1, 2020, compared to negative 4.7% inJuly 31, 2021 from the same prior-year period, as the same prior-year period included significant inventory reserves and the current period benefited from leveraging of expenses.
Loss from operations from our Asia segment decreased by $19.5 million for the six months ended July 31, 2021 from the same prior-year period driven primarily by lower gross margins and, to a lesser extent, a higher SG&A rate. The lower gross margins were due primarily to the negative impacts from the COVID-19 pandemic which resulted in highersignificant inventory reserves in the same prior-year period and to a lesser extent, overall deleveraging of occupancy costs and higher markdowns. The higher SG&A rate was driven primarily by overall deleveragingthe leveraging of expenses partially offset byin the favorable impact from business mix.
Losscurrent year quarter. Currency translation fluctuations relating to our Asian operations unfavorably impacted loss from operations by $0.2 million.
Licensing
Net royalty revenue from our AsiaLicensing segment deterioratedincreased by $18.1 million, or 226.7%, to $26.1$18.4 million for the six months ended August 1, 2020, from $8.0 million in the same prior-year period. The deterioration was driven primarily by the unfavorable impact on earnings from lower revenue and, to a lesser extent, lower product margins, partially offset by lower SG&A expenses and, to a lesser extent, lower occupancy costs. Currency translation fluctuations relating to our Asian operations favorably impacted loss from operations by $1.0 million.
Licensing
Net royalty revenue from our Licensing segment decreased by $12.3 million, or 32.9%, to $25.1 million for the six months ended August 1, 2020,July 31, 2021 compared to $37.4 million in the same prior-year period due primarily to lowerhigher demand resulting from the COVID-19 pandemic.and strong performance in handbags, footwear, eyewear and watches.
Earnings from operations from our Licensing segment decreasedincreased by $10.6 million, or 32.9%, to $21.6$18.0 million for the six months ended August 1, 2020,July 31, 2021 compared to $32.2 million in the same prior-year period. The decrease wasperiod driven primarily by the unfavorable impact to earnings from lower revenue.leveraging of expenses.
Corporate Overhead
Unallocated corporate overhead decreasedincreased by $8.9 million to $46.1$11.8 million for the six months ended August 1, 2020, compared to $55.0 million inJuly 31, 2021 from the same prior-year period due primarily to lower expenses in the prior-year period mainly related to expense savings in response to the pandemic and lower performance-based compensation and, to a lesser extent, lower overall discretionary expenses.compensation.
Non-GAAP Measures
The Company’s reported financial results areinformation presented in accordance with GAAP. The reported net loss attributable to Guess?, Inc.this Quarterly Report includes non-GAAP financial measures, such as adjusted results and diluted loss per share forconstant currency financial information. For the three and six months ended July 31, 2021 and August 1, 2020, reflectthe adjusted results exclude the impact of asset impairment charges, net gains on lease terminations, certain professional service and legal fees and related (credits) costs,, certain separation charges, asset impairment charges, net gains on lease modifications, non-cash amortization of debt discount on the Company’sour convertible senior notes, and the related income tax effectsimpacts of these adjustments as well as certain discrete income tax adjustments. Theadjustments, where applicable. These non-GAAP measures are provided in addition to, and not as alternatives for, our reported net earnings attributable to Guess?, Inc. and diluted earnings per share for the three and six months ended August 3, 2019 reflect the impact of asset impairment charges, certain professional service and legal fees and related costs, amortization of debt discount on the Company’s convertible senior notes and the tax effects of these adjustments as well as adjustments to uncertain tax positions excluded from results in prior years. GAAP results.
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 believes thatWe have excluded these items from our adjusted financial measures primarily because we believe these items are not indicative of the underlying performance of itsour business and that the “non-GAAP” or “adjusted”adjusted financial information provided is useful for investors to evaluate the comparability of the Company’sour operating results and itsour future outlook when(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’sstatements).
A reconciliation of reported GAAP results. results to comparable non-GAAP results follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Jul 31, 2021 | | Aug 1, 2020 | | Jul 31, 2021 | | Aug 1, 2020 |
Reported GAAP net earnings (loss) attributable to Guess?, Inc. | $ | 61,062 | | | $ | (20,358) | | | $ | 73,068 | | | $ | (178,024) | |
Certain professional service and legal fees and related (credits) costs1 | 109 | | | (151) | | | 1,187 | | | 139 | |
Separation charges2 | — | | | 2,507 | | | — | | | 2,680 | |
Asset impairment charges3 | 1,501 | | | 11,969 | | | 1,942 | | | 64,941 | |
Net gains on lease modifications4 | (420) | | | (885) | | | (2,565) | | | (429) | |
Amortization of debt discount5 | 2,781 | | | 2,598 | | | 5,562 | | | 5,197 | |
Discrete tax adjustments6 | 81 | | | 8,061 | | | 228 | | | 170 | |
Income tax impact from adjustments7 | (1,036) | | | (4,380) | | | (1,471) | | | (14,226) | |
Total adjustments affecting net earnings (loss) attributable to Guess?, Inc. | 3,016 | | | 19,719 | | | 4,883 | | | 58,472 | |
Adjusted net earnings (loss) attributable to Guess?, Inc.8 | $ | 64,078 | | | $ | (639) | | | $ | 77,951 | | | $ | (119,552) | |
| | | | | | | |
Net earnings (loss) per common share attributable to common stockholders: | | | | |
GAAP diluted | $ | 0.91 | | | $ | (0.31) | | | $ | 1.10 | | | $ | (2.72) | |
Adjusted diluted | $ | 0.96 | | | $ | (0.01) | | | $ | 1.17 | | | $ | (1.83) | |
______________________________________________________________________Notes:
The adjusted measures for the three months ended August 1 2020 exclude the impact of $12.0 million of asset impairment charges; $0.9 million of net gains on lease terminations; a net credit of $0.2 million of Amounts recorded represent certain professional servicesservice and legal fees and related costs; $2.5 million(credits) costs, which we otherwise would not have incurred as part of our business operations.
2 Amounts represent certain separation-related charges due to headcount reduction in response to the pandemic and due to the separation charges; $2.6 million of amortization of debt discount on the Company’s convertible senior notes and $8.1 million in additional tax expense from certain discrete tax adjustments. Theour former Chief Executive Officer.
3 Amounts represent asset impairment charges related primarily to the impairment of certain operating lease right-of-use assets and to a lesser extent, impairment of 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 and expected store closures.
4. The Amounts recorded represent net gains on lease terminationsmodifications related primarily to the early termination of certain lease agreements. Certain
5 In April 2019, we issued $300 million principal amount of 2.00% convertible senior notes due 2024 (the “Notes”) in a private 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. Estimates of adjusted earnings per share for the full fiscal year 2024 exclude the amortization anticipated to be recorded in those years as such amounts are known. We have not assumed any potential share dilution related to the convert or related warrants.
6 Amounts represent discrete income tax adjustments related primarily to the impacts from cumulative valuation allowances and the income tax benefits from an income tax rate change due to net operating loss carrybacks.
7 The income tax effect of certain professional service and legal fees and related (credits) costs, were primarily due to amounts which the Company otherwise would not have incurred as part of its business operations. The separation-relatedseparation charges, mainly related to cash severance payments as a result of headcount reductions in response to the pandemic. During the three months ended August 1, 2020, the Company recorded a discrete tax expense of $7.9 million related to improved forecasts for the current fiscal year which changes the estimate of the net operating losses that the Company can carryback to tax years with a higher federal corporate tax rate as allowed under the CARES Act. These items resulted in a combined $19.7 million negative impact (after considering the related tax benefit of $4.4 million), or an unfavorable $0.30 per share impact during the three months ended August 1, 2020. Net loss attributable to Guess?, Inc. was $20.4 million and diluted loss was $0.31 per common share for the three months ended August 1, 2020. Excluding the impact of these items, adjusted net loss attributable to Guess?, Inc. was $0.6 millionand adjusted diluted loss was $0.01 per common share for the three months ended August 1, 2020.
The adjusted measures for the six months ended August 1, 2020 exclude the impact of $64.9 million of asset impairment charges; $0.4 million ofcharges, net gains on lease terminations; $0.1 millionmodifications and the amortization of debt discount was based on our assessment of deductibility using the statutory income tax rate (inclusive of the impact of valuation allowances) of the tax jurisdiction in which the charges were incurred.
8 The adjusted results reflect the exclusion of certain professional servicesservice and legal fees and related costs; $2.7 million of(credits) costs, certain separation charges; $5.2 million of amortization of debt discount related to the Company’s convertible senior notes; and $0.2 million in additional tax expense from certain discrete tax adjustments. Thecharges, asset impairment charges, related to the impairment of certain operating lease right-of-use assets and, to a lesser extent, impairment of 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. The net gains on lease terminations related primarily to the early termination of certain lease agreements. The separation-related charges mainly related to certain cash severance payments, partially offset by adjustments tomodifications, 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. During the six months ended August 1, 2020, the Company recognized a tax benefit of approximately $3.9 million 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. This benefit was partially offset by a valuation allowance of $3.7 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. These items resulted in a combined $58.5 million negative impact (after considering the related tax benefit of $14.2 million), or an unfavorable $0.89 per share impact during the six months ended August 1, 2020. Net loss attributable to Guess?, Inc. was $178.0 million and diluted loss was $2.72 per common share for the six months ended August 1, 2020. Excluding the impact of these items, adjusted net loss attributable to Guess?, Inc. was $119.6 millionand adjusted diluted loss was $1.83 per common share for the six months ended August 1, 2020.
The adjusted measures for the three months ended August 3, 2019 exclude the impact of $1.5 million of asset impairment charges; $0.4 million of certain professional services and legal fees and related costs and $2.4 million of amortization of debt discount on the Company’sour convertible senior notes. The asset impairment charges related primarily to the impairment of property and equipment related to certain retail locations resulting from under-performance and expected store closures. These items resulted in a combined $2.1 million negative impact (after consideringnotes, the related income tax benefit of $2.3 million), or an unfavorable $0.03 per share impact during the three months ended August 3, 2019. Net earnings attributable to Guess?, Inc. were $25.3 million and diluted earnings were $0.35 per common share for the three months ended August 3, 2019. Excluding the impactimpacts of these items,adjustments, as well as certain discrete income tax adjustments, where applicable. A complete reconciliation of actual results to adjusted net earnings attributableresults is presented in the “Reconciliation of GAAP Results to Guess?, Inc. were $27.4 million and adjusted diluted earnings were $0.38 per common share for the three months ended August 3, 2019.
The adjusted measures for the six months ended August 3, 2019 exclude the impact of $3.3 million of asset impairment charges; $0.7 million of certain professional services and legal fees and related costs and $2.7 million of amortization of debt discount on the Company’s convertible senior notes. The asset impairment charges related primarily to the impairment of property and equipment related to certain retail locations resulting from under-performance and expected store closures. These items resulted in a combined $3.9 million negative impact (after considering the related tax benefit of $2.8 million), or an unfavorable $0.05 per share impact during the six months ended August 3, 2019. Net earnings attributable to Guess?, Inc. were $3.9 million and diluted earnings were $0.05 per common share for the six months ended August 3, 2019. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were $7.8 million and adjusted diluted earnings were $0.10 per common share for the six months ended August 3, 2019.Adjusted Results.”
Our discussion and analysis herein also includes 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 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 period balance
sheet amount is translated into U.S. dollars at the exchange rate in effect at the comparable prior-year period end. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different from 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, interest payments on our debt, remodeling and rationalization of our retail stores, shop-in-shop programs, concessions, systems, infrastructure, other existing operations, expansion plans, international growth and potential acquisitions and investments. In addition, in the U.S. we need liquidity to fund share repurchases and payment of dividends to our stockholders. Generally, our working capital needs are highest during the late summer and fall as our inventories increase before the holiday selling period.
During the six months ended August 1, 2020,July 31, 2021, we relied primarily on trade credit, available cash, real estate and other operating leases, finance leases, proceeds from our credit facilities and term loans and internally generated funds to finance our operations. We anticipate that we will be able to satisfy our ongoing cash requirements during the next 12 months for working capital, capital expenditures, payments on our debt, finance leases and operating leases, as well as lease terminationmodification payments, potential acquisitions and investments, 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 Facility in the U.S. and Canada as well as bank facilities in Europe and ChinaFacilities and proceeds from our term loans, as needed. As further noted above under the “—COVID-19 Business Update” section, the Company has also implemented a number of other measures to help preserve liquidity in response to the COVID-19 pandemic. We expect to settle the principal amount of our outstanding convertible senior notes in 2024 in cash and any excess in shares. Such arrangements are described further in “Part I, Item 1. Financial Statements – Note 9 – Borrowings and Finance Lease Obligations” and “Part I, Item 1. Financial Statements – Note 10 – Convertible Senior Notes and Related Transactions” of this Form 10-Q. Due to the seasonality of our business and cash needs, we may increase borrowings under our established credit facilities from time-to-time during the next 12 months. If we
experience a sustained decrease in consumer demand related to the COVID-19 pandemic, we may require access to additional credit, which may not be available to us on commercially acceptable terms or at all.
On March 27, 2020,Our outstanding convertible senior notes may be converted at the U.S. government enactedoption of the CARES Actholders as described in “Part I, Item 1, Financial Statements – Note 10 – Convertible Senior Notes and Related Transactions” of this Form 10-Q and in “Note 10 – Convertible Senior Notes and Related Transactions” of the Consolidated Financial Statements included in our Annual Report on Form 10-K. As of July 31, 2021, none of the conditions allowing holders of the convertibles notes to provide economic relief fromconvert had been met. Pursuant to one of these conditions, if our stock trading price exceeds 130% of the COVID-19 pandemic. Among other provisions,$25.78 conversion price of the CARES Act allowsconvertible notes 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. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a full offsetcombination of taxable incomecash and shares of our common stock, at our election, in a five-year carryback period for net operating losses, which will reduce current period tax expensethe manner and may result in a refund of previously paid income tax amounts at higher historical tax rates. During the six months ended August 1, 2020, the Company recognized a tax benefit of approximately $3.9 million related to this provision.
In December 2017, the U.S. government enacted the Tax Reform, which significantly changed the U.S. corporate income tax laws, including moving from a global taxation regime to a territorial regime and lowering the U.S. federal corporate income tax rate from 35% to 21%. The Tax Reform also required a one-time mandatory transition tax on accumulated foreign earnings. Any income tax payable relatedsubject to the transition tax is due over an eight-year period beginningterms and conditions provided in calendar 2018.the indenture governing the convertible notes. The balance related to this transition tax includedconvertible note hedge transaction we entered into in other long-term liabilities was $19.9 million (excluding related interest) for eachconnection with our issuance of the periods ended August 1, 2020convertible 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 the case may be. We expect to settle the principal amount of our outstanding convertible senior notes in 2024 in cash and February 1, 2020.any excess in shares.
The Company hasWe have historically considered the undistributed earnings of itsour foreign subsidiaries to be indefinitely reinvested. As a result of the Tax Reform, the Companytax reform, we had a substantial amount of previously taxed
earnings that could be distributed to the U.S. without additional U.S. taxation. The Company continuesWe continue to evaluate itsour plans for reinvestment or repatriation of unremitted foreign earnings and regularly reviews itsreview our cash positions and determination of permanent reinvestment of foreign earnings. If the Company determineswe determine that all or a portion of such foreign earnings are no longer indefinitely reinvested, itwe may be subject to additional foreign withholding taxes and U.S. state income taxes, beyond the Tax Reform’s one-time transition tax. The Company intendsWe intend to indefinitely reinvest the remaining earnings from the Company’sour 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. As of August 1, 2020, the CompanyJuly 31, 2021, we had cash and cash equivalents of $328.0$458.9 million, of which approximately $72.7$114.2 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 and money market accounts. Please see “—Important Factors Regarding Forward-Looking Statements” discussed above, “Part II, Item 1A. Risk Factors” in this Form 10-Q and “Part I, Item 1A. Risk Factors” contained in the Company’sour most recent Annual Report on Form 10-K for the fiscal year ended February 1, 2020January 30, 2021 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.
COVID-19 Impact on Liquidity
Refer to the “—COVID-19“COVID-19 Business Update” section above for a discussion of the impact from the COVID-19 pandemic on our financial performance and our liquidity.
In light of store closures and reduced traffic in stores, the Company haswe have taken certain actions with respect to certain of itsour existing leases, including engaging with landlords to discuss rent deferrals as well as other rent concessions. Since April 2020, Throughout the COVID-19 pandemic, we have suspended rental payments and/or paid reduced rental amounts with respect to our retail stores that were closed or were experiencing drastically reduced customer traffic as a result of the COVID-19 pandemic. During fiscal 2022 and 2021, we have successfully negotiated with several landlords, including some of our larger landlords and have received rent abatement benefits as well as new lease terms for some of our affected leases. We are engagingcontinue to engage in discussions with theadditional affected landlords in an effort to achieve appropriate rent relief and other lease concessions and, in some cases, to terminate existing leases. However, there can be no assurancesIn some instances, where negotiations with landlords have proven unsuccessful,
we are engaged in litigation related to rent obligations both during the outcomeCOVID-19 pandemic and through the term of such negotiations.the lease.
Six Months Ended July 31, 2021 and August 1, 2020 and August 3, 2019
The Company has presented below the cash flow performance comparison of the six months ended August 1, 2020, compared to the six months ended August 3, 2019.
Operating Activities
Net cash provided by operating activities was $43.0 million for the six months ended July 31, 2021, compared to $40.7 million for the six months ended August 1, 2020, compared to net cash used in operating activities of $23.0 million for the six months ended August 3, 2019, or an improvement of $63.6$2.3 million. This improvement was driven primarily by favorablehigher cash flows generated from net earnings, partially offset by unfavorable changes in working capital, partially offset by lowercash flows generated fromnet earnings. The favorable changes in working capital were due primarily to the extension of vendor payment terms on our accounts payable balances and the suspension and/or reduction of our operating lease payments, which could be temporary, as well as overall lower expenditures. In addition, during the six months ended August 3, 2019, net cash used in operating activities included the payment of the European Commission fine of $45.6 million which was imposed and accrued in fiscal 2019.capital.
Investing Activities
Net cash used in investing activities was $20.8 million for the six months ended July 31, 2021 compared to $12.0 million for the six months ended August 1, 2020, compared to $33.9 million for the six months ended August 3, 2019.2020. Net cash used in investing activities for the six months ended August 1, 2020July 31, 2021 related primarily to capital expenditures incurred on investments in technology and other infrastructure and, to a lesser extent, existing store remodeling programs and international retail expansion. In addition, purchases of investments, settlements of forward exchange currency contracts and proceeds from the sale of long-term assets are also included in cash flows used in investing activities.
The decreaseincrease in cash used in investing activities was driven primarily by lower spending onhigher strategic investments in technology and retail expansionremodels during the six months ended August 1, 2020July 31, 2021 compared to the same prior-year period. During the six months ended
August 1, 2020, the Company July 31, 2021, we opened seven33 directly-operated stores compared to 43seven directly-operated stores that were opened in the same prior-year period.
Financing Activities
Net cash used in financing activities was $26.6 million for the six months ended July 31, 2021 compared to net cash provided by financing activities wasof $13.6 million for the six months ended August 1, 2020, compared to net2020. Net cash used in financing activities of $18.5 million for the six months ended August 3, 2019. Net cash provided by financing activities for the six months ended August 1, 2020July 31, 2021 related primarily to netpayment of dividends and repayments on borrowings and finance lease obligations, partially offset by proceeds from borrowings. In addition, repurchases of shares of the Company’s common stock, cash activity from the issuance of common stock under our equity plans, payment of dividends, payments related to finance lease obligations and net proceeds related to issuance of convertible senior notes and related warrants are also included in cash flows from financing activities.
The increasechange in cash provided by (used in) financing activities was driven primarily by the lower investments made in share repurchases and, to a lesser extent, higher net proceeds received from borrowings, lower repayments of borrowings and lowerhigher payment of dividends during the six months ended August 1, 2020July 31, 2021 compared to the same prior-year period. This was partially offset by net proceeds from the issuance of convertible senior notes and related warrants during the six months ended August 3, 2019.
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash
During the six months ended August 1, 2020, changesThe change in foreign currency translation rates increaseddecreased our reported cash, cash equivalents and restricted cash balance by $5.7 million compared to an increase by $1.1 million. This compares to a decrease of $4.0 million in cash, cash equivalents and restricted cash driven by changes in foreign currency translation rates during the six months ended August 3, 2019.1, 2020. Refer to “Foreign Currency Volatility” for further information on fluctuations in exchange rates.
Working Capital
As of August 1, 2020, the CompanyJuly 31, 2021, we had net working capital (including cash and cash equivalents) of $343.5$548.7 million compared to $425.8$470.0 million at February 1, 2020January 30, 2021 and $294.2$343.5 million at August 3, 2019.1, 2020.
The Company’sOur primary working capital needs are for the current portion of lease liabilities, accounts receivable and inventory. 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 the Americas and 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 decreasedincreased by $46.5$53.4 million, or 15.9%21.7%, to $246.5$299.9 million as of August 1, 2020,July 31, 2021, from $293.0$246.5 million at August 3, 2019.1, 2020. On a constant currency basis, accounts receivable decreasedincreased by $54.9$50.5 million, or 18.7%20.5%, when compared to August 3, 2019, driven primarily by lower wholesale shipments compared to the same prior-year period.1, 2020. As of August 1, 2020,July 31, 2021, approximately 58%55% of our total net trade receivables and 68%70% 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 decreasedincreased by $64.8$10.9 million, or 13.4%2.6%, to $419.4$430.3 million as of August 1, 2020,July 31, 2021, from $484.2$419.4 million at August 3, 2019.1, 2020. On a constant currency basis, inventory decreasedincreased by $72.6$4.5 million, or 15.0%1.1%, when compared to August 3, 2019,1, 2020, driven primarily by improved inventory management compared to the same prior-year period.management.
Capital Expenditures
Gross capital expenditures totaled $21.6 million, before deducting lease incentives of $1.5 million, for the six months ended July 31, 2021. This compares to gross capital expenditures of $10.1 million, before deducting lease incentives of $0.5 million, for the six months ended August 1, 2020. This compares to gross capital expenditures of $34.6 million, before deducting lease incentives of $4.0 million for the six months ended August 3, 2019.
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 fiscalOn August 25, 2021, the Companywe 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.
On September 2, 2020, the Company announced that it was resuming its quarterly cash dividend program and declared a regular quarterly cash dividend of $0.1125 per share on the Company’sour common stock. The Company also decided not to declare any cash dividends for the first or second quarters of fiscal 2021. The cash dividend will be paid on October 2, 2020September 24, 2021 to shareholders of record as of the close of business on September 16, 2020.8, 2021.
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’sour Board of Directors, which reserves the right to change or terminate the Company’sour 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
There were no shares repurchased under our share repurchase program during the six months ended July 31, 2021. There were 4,000,000 shares repurchased at an aggregate cost of $38.8 million under the program during the three and six months ended August 1, 2020. As of July 31, 2021, we had remaining authority under the program to purchase $48 million shares of our common stock.
On June 26, 2012, the Company’sAugust 25, 2021, we announced that our Board of Directors has authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to $200 million of our common stock. The newly authorized $200 million program includes the $48 million remaining under our previously authorized $500 million of the Company’s common stock.repurchase program. 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 whichand the program may be discontinued at any time, without prior notice. There were 4,000,000 shares repurchased at an aggregate cost of $38.8 million under the program during the three and six months ended August 1, 2020. During the six months ended August 3, 2019, the Company repurchased 11,013,304 shares under the program at an aggregate cost of $212.5 million, which is inclusive of the shares repurchased under the ASR Contract. The Company repurchased 10,264,052 shares at an aggregate cost of $201.5 million during the three months ended May 4, 2019 and an additional 749,252 shares at an aggregate cost of $11.0 million during the three months ended August 3, 2019. As of August 1, 2020, the Company had remaining authority under the program to purchase $47.8 million of its common stock.
Borrowings and Finance Lease Obligations and Convertible Senior Notes
See “Part I, Item 1. Financial Statements – Note 9 – Borrowings and Finance Lease Obligations” and “Part I, Item 1. Financial Statements – Note 10 – Convertible Senior Notes and Related Transactions” in this Form 10-Q for disclosures about our borrowings and finance lease obligations and convertible senior notes.
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.
As a non-qualified pension plan, no dedicated funding of the SERPour Supplemental Executive Retirement Plan (“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 $68.8$73.4 million and $67.7$72.1 million as of August 1, 2020July 31, 2021 and February 1, 2020,January 30, 2021, respectively, and were included in other assets in the Company’sour condensed consolidated balance sheets. As a result of changes in the value of the insurance policy investments, the Companywe recorded unrealized gains of $2.2 million in other income and expense during the three and six months ended July 31, 2021 and $5.1 million and $2.0 million in other income and expense during the three and six months ended August 1, 2020, respectively, and unrealized gains (losses) of $(0.2) million and $3.0 million in other income and expense during the three and six months ended August 3, 2019, respectively. The projected benefit obligation was $51.7$51.9 million and $51.9$52.3 million as of August 1, 2020July 31, 2021 and February 1, 2020,January 30, 2021, respectively, and was included in accrued expenses and other long-term liabilities in the Company’sour condensed
consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of $0.5 million and $1.0 million were made during the three and six months ended July 31, 2021, respectively.
SERP benefit payments of $0.3 million and $0.8 million were made during the three and six months ended August 1, 2020, respectively. SERP benefit payments of $0.4 million and $0.8 million were made during the three and six months ended August 3, 2019, respectively.
Contractual Obligations and Commitments
During the six months ended August 1, 2020, the Company entered into certain term loans and drew down on certain of its credit facilities to ensure financial flexibility and maintain maximum liquidity in response to uncertainty surrounding the COVID-19 pandemic. See “Part I, Item 1. Financial Statements – Note 9 – Borrowings and Finance Lease Obligations” for further information on these arrangements. As of August 1, 2020,July 31, 2021, there were no other material changes to our contractual obligations and commitments outside the ordinary course of business compared to the disclosures included in our Form 10-K for the fiscal year ended February 1, 2020.
Wholesale Backlog
We generally receive ordersJanuary 30, 2021. See “Part I, Item 1. Financial Statements – Note 9 – Borrowings and Finance Lease Obligations” and “Part I, Item 1. Financial Statements – Note 10 – Convertible Senior Notes and Related Transactions” for fashion apparel three to six months prior to the time the products are delivered to our customers’ stores. The backlog of wholesale orders at any given time is affected by various factors, including seasonality, cancellations, the scheduling of market weeks, the timing of the receipt of orders and the timing of the shipment of orders and may include orders for multiple seasons. Accordingly, a comparison of backlogs of wholesale orders from period-to-period is not necessarily meaningful and may not be indicative of eventual actual shipments. This is particularly true in light of recent events resulting from the COVID-19 pandemic, which we expect could continue to have a material impactfurther information on our wholesale orders and backlog.
U.S. and Canada Backlog.Our U.S. and Canadian wholesale backlog as of August 31, 2020, consisting primarily of orders for fashion apparel, was $32.3 million in constant currency, compared to $41.7 million at September 3, 2019, a decrease of 22.6%.
Europe Backlog. As of August 30, 2020, the European wholesale backlog was €305.7 million, compared to €281.7 million at September 2, 2019, an increase of 8.5%. The backlog as of August 30, 2020 is comprised primarily of sales orders for the Fall/Winter 2020 and Spring/Summer 2021 seasons.these arrangements.
Application of Critical Accounting Policies and Estimates
Our critical accounting policies reflecting our estimates and judgments are described in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020January 30, 2021 filed with the SEC on April 1, 2020.9, 2021. There have been no significant changes to our critical accounting policies during the six months ended August 1, 2020.July 31, 2021.
Recently Issued Accounting Guidance
See “Part I, Item 1. Financial Statements – Note 1 – Basis of Presentation and New Accounting Guidance” for disclosures about recently issued accounting guidance.
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ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk. |
ITEM 3.Quantitative and Qualitative Disclosures About Market Risk.
Exchange Rate Risk
More than halftwo-thirds of product sales and licensing revenue recorded for the six months ended August 1, 2020July 31, 2021 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” contained in the Company’sour most recent Annual Report on Form 10-K for the fiscal year ended February 1, 2020.
January 30, 2021.
Foreign Currency Translation Adjustment
The local selling currency is typically the functional currency for all of the Company’sour significant international operations. In accordance with authoritative guidance, assets and liabilities of the Company’sour 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 recordswe record foreign currency translation adjustments related to itsour noncontrolling interests within stockholders’ equity. Accordingly, our reported other comprehensive income (loss) could be unfavorably impacted if the U.S. dollar strengthens, particularly against the British pound, Canadian dollar, Chinese yuan, euro, Japanese yen, Korean won, Mexican peso, Polish zloty, Russian rouble and Turkish lira. Alternatively, if the U.S. dollar weakens relative to those currencies, our reported other comprehensive income (loss) could be favorably impacted. Our foreign currency translation adjustments recorded in other comprehensive income (loss) are significantly impacted by net assets denominated in euros.
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 (see below).subsidiaries. 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.
During the six months ended August 1, 2020,July 31, 2021, the total foreign currency translation adjustment increaseddecreased stockholders’ equity by $14.3$7.5 million, driven primarily by the weakening of the U.S. dollar against the euro.
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 condensed consolidated statements of income (loss). Net foreign currency transaction losses of $6.7$8.2 million and $2.1$6.7 million were included in the determination of net earnings (loss) for the six months ended July 31, 2021 and August 1, 2020, and August 3, 2019, respectively.
Foreign Exchange Currency Contracts
The Company operatesWe operate in foreign countries, which exposes itus 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-denominated purchases of merchandise and U.S. dollar- and British pound-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 that 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 Companywe 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 isWe 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 the six months ended August 1, 2020, the CompanyJuly 31, 2021, we purchased U.S. dollar forward contracts in Europe totaling US$81.075.0 million that were designated as cash flow hedges. As of August 1, 2020, the CompanyJuly 31, 2021, we had
forward contracts outstanding for itsour European operations of US$139.5114.0 million to hedge forecasted merchandise purchases, which are expected to mature over the next 1712 months. The Company’sOur foreign exchange currency contracts are recorded in itsour condensed 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 that 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 (expense) in the period in which the royalty expense is incurred.
As of August 1, 2020,July 31, 2021, accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a minimal net unrealized loss, of approximately $0.4 million net of tax, of which a net gain of $0.8$0.6 million will be recognized in cost of product sales over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values.
As of August 1, 2020,July 31, 2021, the net unrealized lossgain of the remaining open forward contracts recorded in the Company’sour condensed consolidated balance sheet was approximately $4.1$1.9 million.
At February 1, 2020, the CompanyJanuary 30, 2021, we had forward contracts outstanding for itsour European operations of US$148.6100.0 million that were designated as cash flow hedges. At February 1, 2020,January 30, 2021, the net unrealized gainloss of these open forward contracts recorded in the Company’sour condensed consolidated balance sheet was approximately $4.0$3.3 million.
Foreign Exchange Currency Contracts Not Designated as Hedging Instruments
The Company hasWe also have 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 (expense). For the six months ended August 1, 2020, the CompanyJuly 31, 2021, we recorded a net lossgain of $3.6$0.6 million for itsour euro dollar foreign exchange currency contracts not designated as hedges, which has been included in other income (expense). As of August 1, 2020, the CompanyJuly 31, 2021, we had euro foreign exchange currency contracts to purchase US$62.515.0 million expected to mature over the next ten months.one month. As of August 1, 2020,July 31, 2021, the net unrealized loss of these open forward contracts recorded in the Company’sour condensed consolidated balance sheet was approximately $1.8$0.2 million.
At February 1, 2020, the CompanyJanuary 30, 2021, we had euro foreign exchange currency contracts to purchase US$46.119.0 million. At February 1, 2020,January 30, 2021, the net unrealized gainloss of these open forward contracts recorded in the Company’sour condensed consolidated balance sheet was approximately $0.9$1.2 million.
Sensitivity Analysis
As of August 1, 2020,July 31, 2021, 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$202.0129.0 million, the fair value of the instruments would have decreased by $22.4$14.3 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 $18.4$11.7 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 for certain of these 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, the Companywe 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 itsa 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 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 real estate secured loan (the “Mortgage Debt”). This interest rate swap agreement matures in January 2026 and converts the nature of the Company’s Mortgage Debt 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 Mortgage 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 August 1, 2020,July 31, 2021, accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized loss of $1.0$0.6 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 quarter-end values. As of August 1, 2020,July 31, 2021, the net unrealized loss of the interest rate swap recorded in the Company’sour condensed consolidated balance sheet was approximately $1.3$0.7 million. As of February 1, 2020,January 30, 2021, the net unrealized loss of the interest rate swap recorded in the Company’sour condensed consolidated balance sheet was approximately $0.3$1.0 million.
Sensitivity Analysis
As of August 1, 2020, the Company had borrowings under its credit facility arrangements of $19.2 million which are based on variable rates of interest. Accordingly, changes in interest rates would impact the Company’s results of operations in future periods. A 100 basis point increase in interest rates would not have a significant effect on interest expense for the six months ended August 1, 2020.
As of August 1, 2020, the Company alsoJuly 31, 2021, we had indebtedness related to term loans of $51.8$55.0 million, its Mortgage Debt of $18.8 million and finance lease obligations of $16.3$24.8 million and the Mortgage Debt of $18.2 million. The term loans provide for annual interest rates ranging between 0.5%1.3% to 1.5%2.2%. The finance lease obligations are based on fixed interest rates derived from the respective agreements. The Mortgage 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 Mortgage Debt from LIBOR floating-rate debt to fixed-rate debt. The finance lease obligations are based on fixed interest rates derived from the respective agreements.
The fair values 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 August 1, 2020July 31, 2021 and February 1, 2020,January 30, 2021, the carrying value was not materially different from fair value, as the interest rates on the Company’sour debt approximated rates currently available to the Company.us. The fair value of the Company’sour convertible senior notes is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy.
ITEM 4. 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. 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 quarterly period covered by this report.
There was no change in our internal control over financial reporting during the second quarter of fiscal 20212022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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ITEM 1. | Legal Proceedings. |
ITEM 1.Legal Proceedings.
See “Part I, Item 1. Financial Statements – Note 13 – Commitments and Contingencies – Legal and Other Proceedings” in this Form 10-Q for disclosures about our legal and other proceedings.
ITEM 1A. Risk Factors.
Other than the risk factor noted below, thereThere have not been any material changes fromin the Risk Factors as previously disclosed in our Annual Report on Form 10-K for the year ended February 1, 2020,January 30, 2021 filed with the SEC on April 1, 2020.9, 2021.
Our inability to successfully negotiate rent deferrals or other rent concessions with respect to retail stores that were closed or significantly impacted by the COVID-19 pandemic could result in financial damages, unwanted store closures or other consequences that could negatively impact our financial position, results of operations and cash flows.
Since April 2020, we have suspended rental payments and/or paid reduced rental amounts with respect to our retail stores that were closed or were experiencing drastically reduced customer traffic as a result of the COVID-19 pandemic. We are engaging in discussions with the affected landlords in an effort to achieve appropriate rent relief and other lease concessions and, in some cases, to terminate existing leases. However, there can be no assurances that those discussions will result in satisfactory agreements between the parties. Some landlords of these existing leases have alleged, and others in the future may allege (through notices, lawsuits or other legal actions), that the Company is in default, seeking financial damages, eviction, termination, acceleration of future rent payments or other remedies. While we believe that we have strong legal grounds to support our position for non-payment or partial payment of rent associated with the COVID-19 pandemic, there can be no assurances that such arguments will prevail or that we will be able to reach mutually agreeable terms with our landlords. In addition, any disputes that arise could be costly to litigate and may jeopardize our ability to continue operations at the impacted locations. If any of these scenarios occur and are significant they could negatively impact our future consolidated financial position, results of operations and cash flows.
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ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Items (a) and (b) are not applicable.
Item (c). Issuer Purchases of Equity Securities
Our share repurchases during each fiscal month of the second quarter of fiscal 2022 were as follows:
| | 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 | 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 Programs3 |
May 3, 2020 to May 30, 2020 | | | | | | | | |
May 2, 2021 to May 29, 2021 | | May 2, 2021 to May 29, 2021 | | | | | | | |
Repurchase program1 | — |
| | — |
| | — |
| | $ | 86,650,889 |
| Repurchase program1 | — | | | — | | | — | | | $ | 47,834,956 | |
Employee transactions2 | — |
| | — |
| | — |
| | | Employee transactions2 | — | | | — | | | — | | |
May 31, 2020 to July 4, 2020 | | | | | | | | |
May 30, 2021 to July 3, 2021 | | May 30, 2021 to July 3, 2021 | |
Repurchase program1 | 3,000,000 |
| | $ | 9.83 |
| | 3,000,000 |
| | $ | 57,166,265 |
| Repurchase program1 | — | | | — | | | — | | | $ | 47,834,956 | |
Employee transactions2 | 1,529 |
| | $ | 12.06 |
| | — |
| | | Employee transactions2 | 826 | | | $ | 28.21 | | | — | | |
July 5, 2020 to August 1, 2020 | | | | | | | | |
July 4, 2021 to July 31, 2021 | | July 4, 2021 to July 31, 2021 | |
Repurchase program1 | 1,000,000 |
| | $ | 9.33 |
| | 1,000,000 |
| | $ | 47,834,956 |
| Repurchase program1 | — | | | — | | | — | | | $ | 47,834,956 | |
Employee transactions2 | — |
| | — |
| | — |
| | | Employee transactions2 | — | | | — | | | — | | |
Total | | | | | | | | Total | | | | | | |
Repurchase program1 | 4,000,000 |
| | $ | 9.70 |
| | 4,000,000 |
| | | Repurchase program1 | — | | | — | | | — | | |
Employee transactions2 | 1,529 |
| | $ | 12.06 |
| | — |
| | | Employee transactions2 | 826 | | | $ | 28.21 | | | — | | |
Notes:
______________________________________________________________________1.On June 26, 2012, our Board of Directors authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to $500 million of our common stock (the “2012 Share Repurchase Program”).
Notes:2.Consists 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.
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13.On August 25, 2021, we announced that our Board of Directors has authorized a new program to repurchase, from time-to-time and as market and business conditions warrant, up to $200 million of our common stock. The newly authorized $200 million program (the “2021 Share Repurchase Program”) includes $47.8 million remaining under our previously authorized 2012 Share Repurchase Program. 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 2021 Share Repurchase Program, which may be discontinued at any time, without prior notice. The amounts noted in this table exclude the effect of the 2021 Share Repurchase Program.
| 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.Exhibits.
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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 |
SIGNATURES
Pursuant to the requirements 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. |
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Date: | September 4, 20202, 2021 | By: | /s/ CARLOS ALBERINI |
| | | Carlos Alberini |
| | | Chief Executive Officer |
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Date: | September 4, 20202, 2021 | By: | /s/ KATHRYN ANDERSON |
| | | Kathryn Anderson |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |