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Guess?, Inc. Reports Second Quarter Results

August 29, 2018

LOS ANGELES--(BUSINESS WIRE)--Aug 29, 2018--Guess?, Inc. (NYSE: GES) today reported financial results for its second quarter ended August 4, 2018.

Victor Herrero, Chief Executive Officer, commented, “I am pleased to report that our second quarter results finished above the high-end of our expectations for adjusted operating margin and adjusted earnings per share. Overall, total Company revenues increased 14% in U.S. dollars and 12% in constant currency, driven by continued momentum in Europe and Asia. The second quarter marked another quarter of operating margin expansion for the Company, with a 70 basis points increase in GAAP operating margin and 130 basis points increase in adjusted operating margin. In addition, I am very encouraged by the trends in our Americas Retail business where we posted another quarter of positive comps and expanded our operating margin.”

Mr. Herrero concluded, “Overall, I am very pleased by the momentum we are experiencing across the globe. We are now planning for positive comps in all regions, including the Americas. Looking forward, I feel confident that the ‘turnaround’ has only just begun, as we are well positioned to exit this fiscal year with every business segment profitable and the Company firmly on the path to our 7.5% operating margin goal by continuing to execute on our strategic initiatives.”

This press release contains certain non-GAAP, or adjusted, financial measures. References to “adjusted” results exclude the impact of (i) net gains on lease terminations, (ii) asset impairment charges, (iii) certain professional service and legal fees and related costs, and (iv) the related tax effects of these adjustments, where applicable. A reconciliation of reported GAAP results to comparable non-GAAP results is provided in the accompanying tables and discussed under the heading “Presentation of Non-GAAP Information” below.

Second Quarter Fiscal 2019 Results

For the second quarter of fiscal 2019, the Company recorded GAAP net earnings of $25.5 million, a 67.8% increase compared to $15.2 million for the second quarter of fiscal 2018. GAAP diluted earnings per share increased 72.2% to $0.31 for the second quarter of fiscal 2019, compared to $0.18 for the prior-year quarter. The Company estimates that currency had a positive impact on diluted earnings per share of $0.05 in the second quarter of fiscal 2019.

For the second quarter of fiscal 2019, the Company recorded adjusted net earnings of $29.5 million, an 83.5% increase compared to $16.1 million for the second quarter of fiscal 2018. Adjusted diluted earnings per share increased 89.5% to $0.36, compared to $0.19 for the prior-year quarter.

Net Revenue. Total net revenue for the second quarter of fiscal 2019 increased 13.7% to $645.9 million, compared to $568.3 million in the prior-year quarter. In constant currency, net revenue increased by 12.2%.

Americas Retail revenues decreased 2.0% in U.S. dollars and constant currency. Retail comp sales including e-commerce increased 3% in U.S. dollars and constant currency. Americas Wholesale revenues increased 4.9% in U.S. dollars and 6.8% in constant currency. Europe revenues increased 22.2% in U.S. dollars and 19.4% in constant currency. Retail comp sales including e-commerce increased 5% in U.S. dollars and 2% in constant currency. Asia revenues increased 32.0% in U.S. dollars and 29.0% in constant currency. Retail comp sales including e-commerce increased 17% in U.S. dollars and 14% in constant currency. Licensing revenues increased 19.5% in U.S. dollars and constant currency.

Operating Earnings. GAAP earnings from operations for the second quarter of fiscal 2019 increased 34.0% to $31.9 million (including a $0.8 million unfavorable currency translation impact), compared to $23.8 million in the prior-year quarter. GAAP operating margin in the second quarter increased 70 basis points to 4.9%, compared to 4.2% in the prior-year quarter, driven primarily by the favorable impact from higher European wholesale shipments and lower markdowns in Americas Retail, partially offset by higher distribution costs resulting from the relocation of the Company’s European distribution center and higher retail promotions in Europe. The positive impact of currency on operating margin for the quarter was approximately 10 basis points.

For the second quarter of fiscal 2019, adjusted earnings from operations increased 47.4% to $36.9 million, compared to $25.0 million in the same prior-year quarter. Adjusted operating margin was 5.7%, an increase of 130 basis points compared to the same prior-year quarter.

Operating margin for the Company’s Americas Retail segment improved 460 basis points to 2.8% in the second quarter of fiscal 2019, compared to negative 1.8% in the prior-year quarter, driven primarily by the favorable impact from lower markdowns and negotiated rent reductions, partially offset by higher store selling expenses. Operating margin for the Company’s Americas Wholesale segment decreased 50 basis points to 15.5% in the second quarter of fiscal 2019, from 16.0% in the prior-year quarter, due primarily to lower gross margins driven primarily by the liquidation of aged inventory. Operating margin for the Company’s Europe segment decreased 200 basis points to 9.8% in the second quarter of fiscal 2019, from 11.8% in the prior-year quarter, driven primarily by higher distribution costs resulting from the relocation of the Company’s European distribution center and higher retail promotions, partially offset by overall leveraging of expenses resulting from higher wholesale shipments. Operating margin for the Company’s Asia segment decreased 190 basis points to 2.0% in the second quarter of fiscal 2019, from 3.9% in the prior-year quarter, driven primarily by higher expenses resulting from retail expansion in Australia. Operating margin for the Company’s Licensing segment increased 130 basis points to 88.5% in the second quarter of fiscal 2019, compared to 87.2% in the prior-year quarter.

Other net income was $1.4 million for the second quarter of fiscal 2019, which primarily includes net unrealized and realized mark-to-market revaluation gains on foreign exchange currency contracts and unrealized gains on non-operating assets, partially offset by net unrealized mark-to-market revaluation losses on foreign currency balances, compared to other net expense of $2.2 million in the prior-year quarter.

Six-Month Period Results

For the six months ended August 4, 2018, the Company recorded GAAP net earnings of $4.3 million, compared to GAAP net loss of $6.1 million for the six months ended July 29, 2017. GAAP diluted earnings per share was $0.05 for the six months ended August 4, 2018, compared to GAAP diluted loss per share of $0.08 for the same prior-year period. The Company estimates the positive impact of currency on diluted earnings per share for the six months ended August 4, 2018 was approximately $0.02 per share.

For the six months ended August 4, 2018, the Company recorded adjusted net earnings of $11.6 million, compared to adjusted net loss of $3.3 million for the six months ended July 29, 2017. Adjusted diluted earnings per share were $0.14, compared to adjusted diluted loss per share of $0.04 for the prior-year period.

Net Revenue. Total net revenue for the first six months of fiscal 2019 increased 14.1% to $1.17 billion, compared to $1.02 billion in the same prior-year period. In constant currency, net revenue increased by 10.2%.

Americas Retail revenues decreased 1.7% in U.S. dollars and 2.1% in constant currency. Retail comp sales including e-commerce increased 2% in U.S. dollars and constant currency. Americas Wholesale revenues increased 9.4% in U.S. dollars and 9.1% in constant currency. Europe revenues increased 23.0% in U.S. dollars and 15.4% in constant currency. Retail comp sales including e-commerce increased 9% in U.S. dollars and 2% in constant currency. Asia revenues increased 32.3% in U.S. dollars and 27.1% in constant currency. Retail comp sales including e-commerce increased 20% in U.S. dollars and 15% in constant currency. Licensing revenues increased 21.4% in U.S. dollars and constant currency.

Operating Earnings (Loss). GAAP earnings from operations for the first six months of fiscal 2019 was $7.0 million (including a $4.8 million unfavorable currency translation impact), compared to GAAP operating loss of $1.2 million in the same prior-year period. GAAP operating margin in the first six months of fiscal 2019 increased 70 basis points to 0.6%, compared to negative 0.1% in the prior-year period, driven primarily by lower markdowns in Americas Retail and segment mix, partially offset by higher distribution costs resulting from the relocation of the Company’s European distribution center. The negative impact of currency on operating margin for the first six months of fiscal 2019 was approximately 20 basis points.

For the six months ended August 4, 2018, adjusted earnings from operations increased 484.8% to $16.4 million, compared to $2.8 million for the six months ended July 29, 2017. Adjusted operating margin was 1.4% for the six months ended August 4, 2018, an increase of 110 basis points compared to the same prior-year period.

Operating margin for the Company’s Americas Retail segment improved 670 basis points to relatively breakeven in the first six months of fiscal 2019, compared to negative 6.7% in the same prior-year period, driven primarily by the favorable impact from lower markdowns and negotiated rent reductions. Operating margin for the Company’s Americas Wholesale segment decreased 270 basis points to 15.1% in the first six months of fiscal 2019, from 17.8% in the same prior-year period. The decrease in operating margin was due primarily to lower gross margins driven primarily by the liquidation of aged inventory. Operating margin for the Company’s Europe segment decreased 490 basis points to 2.0% in the first six months of fiscal 2019, from 6.9% in the same prior-year period. This decrease was driven primarily by higher distribution costs resulting from the relocation of the Company’s European distribution center. Operating margin for the Company’s Asia segment increased 120 basis points to 3.4% in the first six months of fiscal 2019, compared to 2.2% in the same prior-year period. The improvement in operating margin was driven primarily by higher gross margins due mainly to overall leveraging of occupancy costs, partially offset by the higher expenses resulting from retail expansion in Australia. Operating margin for the Company’s Licensing segment increased 280 basis points to 88.4% in the first six months of fiscal 2019, compared to 85.6% in the same prior-year period.

Other net expense was $1.3 million for the first six months of fiscal 2019, which primarily includes net unrealized mark-to-market revaluation losses on foreign currency balances, partially offset by net unrealized and realized mark-to-market revaluation gains on foreign exchange currency contracts, compared to $0.3 million in the prior-year period.

Impact from Adoption of New Revenue Recognition Standard

The Company adopted a comprehensive new revenue recognition standard during the first quarter of fiscal 2019 under a modified retrospective method that does not restate prior periods to be comparable to the current period presentation. The adoption of this guidance primarily impacted the presentation of advertising contributions received from the Company’s licensees and the related advertising expenditures incurred by the Company. Under previous guidance, the Company recorded advertising contributions received from its licensees and the related advertising expenditures incurred by the Company on a net basis in its consolidated balance sheet. To the extent that the advertising contributions exceeded the Company’s advertising expenditures for its licensees, the excess contribution was treated as a deferred liability and was included in accrued expenses in the Company’s consolidated balance sheet. Under the new revenue recognition standard, advertising contributions and related advertising expenditures related to the Company’s licensing business are recorded on a gross basis. This resulted in an increase in net royalty revenue within the Company’s Licensing segment of approximately $2.1 million, as well as an increase in selling, general and administrative expenses in our Licensing, Americas Retail and Americas Wholesale segments and corporate overhead of $0.2 million, $0.5 million, $0.2 million and $0.5 million, respectively, during the three months ended August 4, 2018 compared to the same prior-year quarter. The net impact was approximately $0.6 million increase in earnings from operations for the three months ended August 4, 2018. During the six months ended August 4, 2018, this resulted in an increase in net royalty revenue within the Company’s Licensing segment of approximately $4.4 million, as well as an increase in selling, general and administrative expenses in our Licensing, Americas Retail and Americas Wholesale segments and corporate overhead of $0.4 million, $2.3 million, $0.9 million and $1.1 million, respectively, compared to the same prior-year period. The net impact was approximately $0.4 million reduction in earnings from operations for the six months ended August 4, 2018.

Dividends

The Company’s Board of Directors has approved a quarterly cash dividend of $0.225 per share on the Company’s common stock. The dividend will be payable on September 28, 2018 to shareholders of record at the close of business on September 12, 2018.

Outlook

The Company’s expectations for the third quarter ending November 3, 2018 and its updated outlook for the fiscal year ending February 2, 2019 are as follows:

A reconciliation of the Company’s outlook for GAAP operating margin to adjusted operating margin and GAAP earnings per share to adjusted earnings per share for the third quarter ending November 3, 2018 and the fiscal year ending February 2, 2019 is as follows:

On a segment basis, the Company expects the following ranges for percentage changes for comparable sales including e-commerce (“comps”) and net revenue in U.S. dollars and constant currency compared to the same prior-year period:

Presentation of Non-GAAP Information

The financial information presented in this release includes non-GAAP financial measures such as adjusted results, constant currency financial information and free cash flow measures. For the three and six months ended August 4, 2018, the adjusted results exclude the impact of net gains on lease terminations, asset impairment charges, certain professional service and legal fees and related costs, and the tax effects of these adjustments, where applicable. For the three and six months ended July 29, 2017, the adjusted results exclude the impact of asset impairment charges and the related tax impact, where applicable. These non-GAAP measures are provided in addition to, and not as alternatives for, the Company’s reported GAAP results.

The Company has excluded these items from its adjusted financial measures primarily because it believes these items are not indicative of the underlying performance of its business and that the adjusted financial information provided is useful for investors to evaluate the comparability of the Company’s operating results and its future outlook (when reviewed in conjunction with the Company’s GAAP financial statements). A reconciliation of reported GAAP results to comparable non-GAAP results is provided in the accompanying tables.

This release also includes certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating the Company’s 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 provides constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate net revenue, comparable sales and earnings (loss) from operations on a constant currency basis, actual or forecasted 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. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. However, in calculating the estimated impact of currency on our earnings (loss) per share for our actual and forecasted results, the Company estimates gross margin (including the impact of merchandise-related hedges) and expenses using the appropriate prior-year rates, translates the estimated foreign earnings 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 currency contracts not designated as merchandise hedges. The constant currency information presented may not be comparable to similarly titled measures reported by other companies.

The Company also includes information regarding its free cash flows in this release. The Company calculates free cash flows as cash flows from operating activities less (i) purchases of property and equipment and (ii) payments for property and equipment under capital leases. Free cash flows is not intended to be an alternative to cash flows from operating activities as a measure of liquidity, but rather provides additional visibility to investors regarding how much cash is generated for discretionary and non-discretionary items after deducting purchases of property and equipment and payments for property and equipment under capital leases. Free cash flow information presented may not be comparable to similarly titled measures reported by other companies. A reconciliation of reported GAAP cash flows from operating activities to the comparable non-GAAP free cash flow measure is provided in the accompanying tables.

Investor Conference Call

The Company will hold a conference call at 4:45 pm (ET) on August 29, 2018 to discuss the news announced in this press release. A live webcast of the conference call will be accessible at via the “Investor Relations” link. The webcast will be archived on the website for 30 days.

About Guess?

Guess?, Inc. designs, markets, distributes and licenses a lifestyle collection of contemporary apparel, denim, handbags, watches, footwear and other related consumer products. Guess? products are distributed through branded Guess? stores as well as better department and specialty stores around the world. As of August 4, 2018, the Company directly operated 1,061 retail stores in the Americas, Europe and Asia. The Company’s licensees and distributors operated 601 additional retail stores worldwide. As of August 4, 2018, the Company and its licensees and distributors operated in approximately 100 countries worldwide. For more information about the Company, please visit www.guess.com.

Forward-Looking Statements

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