PART I
ITEM 1. Business.
General
Unless the context indicates otherwise, the terms “we,” “us,” “our” or the “Company” in this Form 10-K refer to Guess?, Inc. (“GUESS?”) and its subsidiaries on a consolidated basis.
We design, market, distribute and license one of the world’s leading lifestyle collections of contemporary apparel and accessories for men, women and children that reflect the American lifestyle and European fashion sensibilities. Our apparel is marketed under numerous trademarks
including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, MARCIANO, Question Mark and Triangle Design, a stylized G and a stylized M, GUESS Kids, Baby GUESS, YES, G by GUESS, GUESS by MARCIANO and Gc.
The lines include full collections of clothing, including jeans, pants, skirts, dresses, shorts, blouses, shirts, jackets, knitwear and intimate apparel. In addition, we selectively grant licenses to design, manufacture and distribute a broad range of products that complement our apparel lines, including eyewear, watches, handbags, footwear, kids’ and infants’ apparel, outerwear, fragrance, jewelry and other fashion accessories. We also grant licenses to certain wholesale partners to operate and sell our products through licensed retail stores.
Our products are sold through direct-to-consumer, wholesale and licensing distribution channels. Our core customer is a style-conscious consumer primarily between the ages of 20 and 35. These consumers are part of a highly desirable demographic group that we believe, historically, has had significant disposable income. We also appeal to customers outside this group through specialty product lines that include MARCIANO, a more sophisticated fashion line targeted to women and men, and GUESS Kids, targeted to boys and girls ages 6 to 12.
We were founded in 1981 and currently operate as a Delaware corporation.
The Company operates on a
52
/
53
-week fiscal year calendar, which ends on the Saturday nearest to January 31 of each year.
All references herein to “fiscal
2018
,” “fiscal
2017
” and “fiscal
2016
” represent the results of the
53
-week fiscal year ended
February 3, 2018
and the
52
-week fiscal years ended
January 28, 2017
and
January 30, 2016
. The additional week in fiscal 2018 occurred during the fourth quarter ended February 3, 2018. References to “fiscal
2019
” represent the
52
-week fiscal year ending February 2, 2019.
Business Strengths
We believe we have several business strengths that set us apart from our competition, including:
Brand Equity.
The GUESS? brand is an integral part of our business, a significant strategic asset and a primary source of sustainable competitive advantage. The GUESS? brand communicates a distinctive image that is fun, fashionable and sexy. We have developed and maintained this image worldwide through our consistent emphasis on innovative and distinctive product designs and through our award-winning advertising, under the creative leadership and vision of Paul Marciano, our Executive Chairman of the Board and Chief Creative Officer. Brand loyalty, name awareness, perceived quality, strong brand images, public relations, publicity, promotional events and trademarks all contribute to the reputation and integrity of the GUESS? brand.
Global Diversification.
The global success of the GUESS? brand has reduced our reliance on any particular geographic region. This geographic diversification provides broad opportunities for growth, even during regional economic slowdowns. The percentage of our revenue generated from outside of the U.S. has grown from approximately 32% of our total revenues for the year ended December 31, 2005 to approximately
69%
of our total revenues for the year ended
February 3, 2018
. As of
February 3, 2018
, the Company directly operated
1,011
retail stores in the Americas, Europe and Asia. The Company’s partners operated
652
additional retail stores worldwide. As of
February 3, 2018
, the Company and its partners operated in approximately
100
countries worldwide. We continue to evaluate the different businesses in our global portfolio, directing capital investments to those with more profit potential. For instance, we plan to allocate sufficient resources to fuel future growth in Asia, particularly in mainland China, where we see significant opportunities. In addition, we plan to target overall growth in other markets such as Russia, Turkey and Northern Europe where we believe the GUESS? brand is underpenetrated.
Multiple Distribution Channels.
We use direct-to-consumer, wholesale and licensing distribution channels to sell our products globally. This allows us to maintain a critical balance as our operating results do not depend solely on the performance of any single channel. The use of multiple channels also allows us to adapt quickly to changes in the distribution environment in any particular region.
Direct-to-Consumer.
Our direct-to-consumer network is omni-channel, made up of both directly operated brick-and-mortar retail stores and concessions as well as integrated e-commerce sites that create a seamless shopping experience for our customers.
Directly operated retail stores and concessions.
Distribution through our directly operated retail stores and concessions allows us to influence the merchandising and presentation of our products, enhance our brand image, build brand equity and test new product design concepts. Our store locations vary country by country depending on the type of locations available. In general, our stores average approximately 5,000 square feet in the Americas, approximately 3,000 square feet in Europe and the Middle East and approximately 2,000 square feet in Asia and the Pacific. Concessions generally average 1,000 square feet and are located primarily in South Korea and Greater China. As part of our omni-channel initiative, retail store sales in certain regions may be fulfilled from one of our numerous retail store locations or from our distribution centers.
Our directly operated retail stores and concessions as of
February 3, 2018
,
January 28, 2017
and
January 30, 2016
were comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Region
|
|
Stores
|
|
Concessions
|
|
Stores
|
|
Concessions
|
|
Stores
|
|
Concessions
|
United States
|
|
306
|
|
|
—
|
|
|
339
|
|
|
—
|
|
|
342
|
|
|
—
|
|
Canada
|
|
89
|
|
|
—
|
|
|
111
|
|
|
—
|
|
|
113
|
|
|
—
|
|
Central and South America
|
|
59
|
|
|
27
|
|
|
51
|
|
|
30
|
|
|
46
|
|
|
—
|
|
Total Americas
|
|
454
|
|
|
27
|
|
|
501
|
|
|
30
|
|
|
501
|
|
|
—
|
|
Europe and the Middle East
|
|
400
|
|
|
33
|
|
|
336
|
|
|
31
|
|
|
280
|
|
|
26
|
|
Asia and the Pacific
|
|
157
|
|
|
177
|
|
|
108
|
|
|
193
|
|
|
54
|
|
|
169
|
|
Total
|
|
1,011
|
|
|
237
|
|
|
945
|
|
|
254
|
|
|
835
|
|
|
195
|
|
e-Commerce.
As of
February 3, 2018
, we operated retail websites in the Americas, Europe and Asia. We have e-commerce available to 55 countries and in ten languages around the world. Our websites act as virtual storefronts that both sell our products and promote our brands. Designed as customer shopping centers, these sites showcase our products in an easy-to-navigate format, allowing customers to see and purchase our collections of apparel and accessories. These virtual stores have not only expanded our direct-to-consumer distribution channel, but they have also improved customer relations and are fun and entertaining alternative-shopping environments. As part of our omni-channel initiative, e-commerce orders in certain regions may be fulfilled from our distribution centers, or from our retail stores, or both.
Wholesale Distribution.
We sell through both domestic and international wholesale distribution channels as well as retail stores and concessions operated by certain wholesale partners.
Wholesale.
In Europe, our products are sold in stores ranging from
large, well-known department stores like El Corte Inglès, Galeries Lafayette and Printemps
to small upscale multi-brand boutiques. Because our European wholesale business is more fragmented, we generally rely on a large number of smaller regional distributors and agents to distribute our products. In the Americas, our wholesale customers consist primarily of better department stores, including Macy’s, Liverpool and The Bay, and select specialty retailers and upscale boutiques, which have the image and merchandising expertise that we require for the effective presentation of our products. Through our foreign subsidiaries and our network of international distributors, our products are also available in major cities throughout Africa, Asia, Australia and the Middle East.
Licensed stores and concessions.
We also sell product to
certain wholesale customers who operate licensed
retail stores and concessions
which allows us to expand our international operations with a lower level of capital investment while still closely monitoring store designs and merchandise programs in order to protect the integrity of the GUESS? brand.
Licensed retail stores and concessions operated by our wholesale partners as of
February 3, 2018
,
January 28, 2017
and
January 30, 2016
were comprised as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Region
|
|
Stores
|
|
Concessions
|
|
Stores
|
|
Concessions
|
|
Stores
|
|
Concessions
|
United States
|
|
2
|
|
|
1
|
|
|
2
|
|
|
1
|
|
|
1
|
|
|
—
|
|
Central and South America
|
|
44
|
|
|
—
|
|
|
44
|
|
|
—
|
|
|
53
|
|
|
—
|
|
Total Americas
|
|
46
|
|
|
1
|
|
|
46
|
|
|
1
|
|
|
54
|
|
|
—
|
|
Europe and the Middle East
|
|
269
|
|
|
—
|
|
|
293
|
|
|
—
|
|
|
314
|
|
|
—
|
|
Asia and the Pacific
|
|
337
|
|
|
191
|
|
|
396
|
|
|
191
|
|
|
436
|
|
|
247
|
|
Total
|
|
652
|
|
|
192
|
|
|
735
|
|
|
192
|
|
|
804
|
|
|
247
|
|
Licensing Operations.
The desirability of the GUESS? brand name among consumers has allowed us to selectively expand our product offerings and global markets through trademark licensing arrangements, with minimal capital investment or on-going operating expenses.
We currently have
various
domestic and international licenses that include eyewear, watches, handbags, footwear, kids’ and infants’ apparel, outerwear, fragrance, jewelry and other fashion accessories; and include licenses for the design, manufacture and distribution of GUESS? branded products in markets which include Africa, Asia, Australia, Europe, the Middle East, Central America, North America and South America.
Multiple Store Concepts.
Our products are sold around the world primarily through six different store concepts, namely our GUESS? full-price retail stores, our GUESS? factory outlet stores, our GUESS? Accessories stores, our G by GUESS stores, our MARCIANO stores and our GUESS? Kids stores. We also have a small number of underwear, Gc watch and footwear concept stores. This allows us to target the various demographics in each region through dedicated store concepts that market each brand or concept specifically to the desired customer population. Having multiple store concepts also allows us to target our newer brands and concepts in different markets than our flagship GUESS? store concept. For instance, we have mall locations for G by GUESS stores where we would not ordinarily operate any of our full-price GUESS? stores.
Business Segments
The Company’s businesses are grouped into
five
reportable segments for management and internal financial reporting purposes:
Americas Retail
,
Americas Wholesale
,
Europe
,
Asia
and
Licensing
.
Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, net gains (losses) from lease terminations, asset impairment charges and restructuring charges, if any.
The
Americas Retail
segment includes the Company’s retail and e-commerce operations in North and Central America and its retail operations in South America. The
Americas Wholesale
segment includes the Company’s wholesale operations in the Americas. The
Europe
segment includes the Company’s retail, e-commerce and wholesale operations in Europe and the Middle East. The
Asia
segment includes the Company’s retail, e-commerce and wholesale operations in Asia and the Pacific. The
Licensing
segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, net gains (losses) on lease terminations, asset impairment charges and restructuring charges. 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.
The following table presents our net revenue and earnings (loss) from operations by segment for the last three fiscal years (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Net revenue:
|
$
|
|
%
|
|
$
|
|
% (1)
|
|
$
|
|
% (1)
|
Americas Retail
|
$
|
833,077
|
|
|
35.3
|
%
|
|
$
|
935,479
|
|
|
42.7
|
%
|
|
$
|
981,942
|
|
|
45.0
|
%
|
Americas Wholesale (2)
|
150,366
|
|
|
6.3
|
|
|
146,260
|
|
|
6.7
|
|
|
155,594
|
|
|
7.1
|
|
Europe (2)
|
998,657
|
|
|
42.2
|
|
|
788,194
|
|
|
36.0
|
|
|
722,877
|
|
|
33.1
|
|
Asia (2)
|
308,899
|
|
|
13.1
|
|
|
248,601
|
|
|
11.3
|
|
|
240,041
|
|
|
11.0
|
|
Net revenue from product sales
|
2,290,999
|
|
|
96.9
|
|
|
2,118,534
|
|
|
96.7
|
|
|
2,100,454
|
|
|
96.2
|
|
Licensing (1)
|
72,755
|
|
|
3.1
|
|
|
71,919
|
|
|
3.3
|
|
|
84,041
|
|
|
3.8
|
|
Total net revenue (1)
|
$
|
2,363,754
|
|
|
100.0
|
%
|
|
$
|
2,190,453
|
|
|
100.0
|
%
|
|
$
|
2,184,495
|
|
|
100.0
|
%
|
Earnings (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Retail (2)
|
$
|
(17,301
|
)
|
|
(26.5
|
%)
|
|
$
|
(22,816
|
)
|
|
(100.4
|
%)
|
|
$
|
18,414
|
|
|
15.2
|
%
|
Americas Wholesale (2)
|
25,161
|
|
|
38.6
|
|
|
24,190
|
|
|
106.5
|
|
|
29,579
|
|
|
24.4
|
|
Europe (2)
|
87,376
|
|
|
134.1
|
|
|
56,961
|
|
|
250.8
|
|
|
53,673
|
|
|
44.2
|
|
Asia (2)
|
14,116
|
|
|
21.7
|
|
|
(2,381
|
)
|
|
(10.5
|
)
|
|
10,309
|
|
|
8.5
|
|
Licensing (2)
|
78,102
|
|
|
119.8
|
|
|
80,386
|
|
|
354.0
|
|
|
92,189
|
|
|
76.0
|
|
Total segment earnings from operations
|
187,454
|
|
|
287.7
|
|
|
136,340
|
|
|
600.4
|
|
|
204,164
|
|
|
168.3
|
|
Corporate overhead (2)
|
(102,429
|
)
|
|
(157.2
|
)
|
|
(73,859
|
)
|
|
(325.3
|
)
|
|
(82,864
|
)
|
|
(68.3
|
)
|
Net gains (losses) on lease terminations (2)
|
(11,373
|
)
|
|
(17.5
|
)
|
|
695
|
|
|
3.1
|
|
|
2,337
|
|
|
1.9
|
|
Asset impairment charges (2)
|
(8,479
|
)
|
|
(13.0
|
)
|
|
(34,385
|
)
|
|
(151.4
|
)
|
|
(2,287
|
)
|
|
(1.9
|
)
|
Restructuring charges
|
—
|
|
|
—
|
|
|
(6,083
|
)
|
|
(26.8
|
)
|
|
—
|
|
|
—
|
|
Total earnings from operations
|
$
|
65,173
|
|
|
100.0
|
%
|
|
$
|
22,708
|
|
|
100.0
|
%
|
|
$
|
121,350
|
|
|
100.0
|
%
|
__________________________________
|
|
(1)
|
During the fourth quarter of fiscal 2018,
the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales
. Accordingly, net revenue has been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation. This reclassification had no impact on previously reported earnings from operations. Refer to Note 1 to the Consolidated Financial Statements for further information.
|
|
|
(2)
|
Segment results have been adjusted for fiscal 2017 and fiscal 2016 to conform to the current year presentation. Refer to Note 1 to the Consolidated Financial Statements for further information on these reclassifications.
|
Additional segment information, together with certain geographical information, is included in Note
17
to the Consolidated Financial Statements contained herein.
Americas Retail
Segment
In our Americas Retail segment, we sell our products direct-to-consumer through a network of directly operated retail and factory outlet stores and e-commerce sites in the Americas.
Retail stores and concessions.
Our Americas Retail stores and concessions are comprised of a mix of GUESS? factory outlet stores, full-priced GUESS? retail stores, G by GUESS stores, GUESS? Accessories stores and MARCIANO stores. For the year ended
February 3, 2018
, we opened
15
new stores and closed
62
stores in the Americas, ending the year with
454
stores. This store count does not include
27
concessions in Mexico. We directly operated our retail stores and concessions in Mexico and Brazil through our majority-owned joint ventures.
e-Commerce.
Our Americas Retail segment also includes our directly operated retail and other marketplace websites in the U.S., Canada and Mexico. These websites
operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands.
They also provide fashion information and a mechanism for customer feedback while promoting customer loyalty and enhancing our brand identity through interactive content online and through
smartphone applications. Our U.S. and Canadian online sites are fully integrated with our customer relationship management (“CRM”) system and loyalty programs. Omni-channel initiatives that we have already deployed in the U.S. and Canada include “reserve online, pick-up in stores” and “order from store” as well as mobile optimized commerce sites and smartphone applications. In the U.S. and Canada, e-commerce orders may be fulfilled from our distribution centers, or from our retail stores, or both.
Americas Wholesale
Segment
In our Americas Wholesale segment, we sell our products through wholesale channels throughout the Americas and to third party distributors based in Central and South America as well as licensed retail locations operated by our wholesale partners. Our Americas Wholesale business generally experiences stronger performance from July through November. Our Americas Wholesale customers consist primarily of better department stores, select specialty retailers, upscale boutiques as well as select off-price retailers. As of
February 3, 2018
, our products were sold to consumers through 1,501 major doors in the Americas as well as through our customers’ e-commerce sites. This compares to 1,790 major doors at
January 28, 2017
. As of
February 3, 2018
, these locations included 874 shop-in-shops, a designated selling area within a department store that offers a wide array of our products and incorporates GUESS? signage and fixture designs. These shop-in-shops, managed by the department stores, allow us to reinforce the GUESS? brand image with our customers. Many department stores have more than one shop-in-shop, with each one featuring women’s, men’s or kids’ apparel.
We also sell product to
licensed
retail stores and concessions
operated by certain wholesale customers. For the year ended
February 3, 2018
, our partners opened
three
new stores and closed
three
stores, ending the year with
46
licensed retail stores in the Americas. As of
February 3, 2018
, the total
46
licensed retail stores were comprised of
44
stores in Central and South America and
two
stores in the U.S. This store count does not include
one
concession that was operated by one of our partners in the U.S.
Our Americas Wholesale merchandising strategy is to focus on trend-right products supported by key fashion basics. We have sales representatives in New York, Los Angeles, Toronto, Montreal, Mexico City and Vancouver who coordinate with customers to determine the inventory level and product mix that should be carried in each store. Additionally, we use merchandise coordinators who work with the stores to ensure that our products are displayed appropriately. During fiscal
2018
,
our
two
largest wholesale customers accounted for a total of approximately
2.2%
of our consolidated net revenue
.
Europe
Segment
In our Europe segment, we sell our products through direct-to-consumer and wholesale channels, primarily throughout Europe and the Middle East.
European Direct-to-Consumer.
Our European direct-to-consumer network is comprised of brick-and-mortar retail stores and concessions and e-commerce sites.
Retail stores and concessions.
Our European retail stores and concessions are comprised of a mix of directly operated GUESS? and MARCIANO retail and outlet stores, GUESS? Accessories retail and outlet stores, GUESS? Footwear stores, GUESS? Kids stores and G by GUESS stores. For the year ended
February 3, 2018
, we opened
72
new stores and closed
nine
stores, ending the year with
400
directly operated stores in Europe and the Middle East. During fiscal
2018
, we also acquired
one
store from one of our European wholesale partners. This store count does not include
33
directly operated concessions in Europe. Certain of our European stores require initial investments in the form of key money to secure prime store locations. These amounts are paid to landlords or existing lessees in certain circumstances.
e-Commerce.
In Europe, similar to the Americas, our e-commerce sites
operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands.
We are leveraging our existing technology and experience from the Americas to deploy similar omni-channel strategies in certain international markets. We currently offer interactive content online and via mobile, and are planning to expand to smartphone applications and integrate with CRM systems and loyalty programs.
European Wholesale Distribution.
We sell our products both through wholesale distribution channels and through licensed retail stores and concessions operated by our wholesale partners throughout Europe and
the Middle East. Our European wholesale business generally relies on a large number of smaller regional distributors and agents to distribute our products primarily to smaller independent multi-brand boutiques. Our products are also sold directly to
large, well-known department stores like El Corte Inglès, Galeries Lafayette and Printemps
. Overall, we have over 7,000 customers with no single customer representing more than 1% of our consolidated net revenue. The type of customer varies from region to region depending on both the prominence of the GUESS? brand in each region and the dominance of a particular type of retail channel in each region. In countries where the brand is well known, we operate through showrooms where agents and distributors can view our line and place orders. We currently have showrooms in key cities such as Barcelona, Dusseldorf, Lugano, Munich and Paris. In countries where the brand is less prominent, we may use one large distributor for the entire region. We sell both our apparel and certain accessories products under our GUESS? and MARCIANO brand concepts through our wholesale channel, operating primarily through two seasons, Spring/Summer and Fall/Winter. Generally our Spring/Summer sales campaign is from April to September with the related shipments occurring primarily from
November to April
. The Fall/Winter sales campaign is from November to April with the related shipments occurring primarily from
May to October
. The Company may take advantage of early-season demand and potential reorders by offering a pre-collection assortment which ships at the beginning of each season. Customers retain the ability to request early shipment of backlog orders or delay shipment of orders depending on their needs. Revenues from sales to our
wholesale licensed
stores are also recognized as wholesale sales within our European wholesale operations. For the year ended
February 3, 2018
, our partners opened
12
new licensed retail stores and closed
35
stores, ending the year with
269
licensed retail stores in Europe and the Middle East. During fiscal
2018
, we also acquired
one
store from one of our European wholesale partners.
Asia
Segment
In our Asia segment, we sell our products through direct-to-consumer and wholesale channels throughout Asia and the Pacific.
Asian Direct-to-Consumer.
Our Asian direct-to-consumer network is comprised of brick-and-mortar retail stores and concessions and e-commerce sites.
Retail stores and concessions.
Our Asian retail stores and concessions include a mix of directly operated GUESS?, GUESS? Underwear, GUESS? Footwear, GUESS? Accessories, GUESS? Kids and MARCIANO stores. For the year ended
February 3, 2018
, we opened
42
new stores and closed
15
stores, ending the year with
157
directly operated stores in Asia and the Pacific. During fiscal
2018
, we also acquired
22
stores from certain of our
Asian
wholesale partners. This store count does not include
177
directly operated apparel and accessory concessions. Concessions are widely used in Asia and generally represent directly managed areas within a department store setting.
e-Commerce.
We also have e-commerce sites throughout Asia which
operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands.
Asian Wholesale Distribution.
Our Asian wholesale customer base is comprised primarily of a small number of selected distributors with which we have contractual distribution arrangements and licensed stores and concessions operated by our wholesale partners. For the year ended
February 3, 2018
, our partners opened
21
new licensed retail stores and closed
58
stores, ending the year with
337
licensed retail stores. During fiscal
2018
, we also acquired
22
stores from certain of our
Asian
wholesale partners. This store count does not include
191
apparel and accessory concessions operated by our partners in Asia.
Licensing
Segment
Our Licensing segment includes the worldwide licensing operations of the Company.
The desirability of the GUESS? brand name among consumers has allowed us to selectively expand our product offerings and global markets through trademark licensing arrangements, with minimal capital investment or on-going operating expenses.
We currently have
various
domestic and international licenses that include eyewear, watches, handbags, footwear, kids’ and infants’ apparel, outerwear, fragrance, jewelry and other fashion accessories; and include licenses for the design, manufacture and distribution of GUESS? branded products in markets which include Africa, Asia, Australia, Europe, the Middle East, Central America, North America and South America.
Our trademark license agreements customarily provide for a multi-year initial term ranging from three to ten years, with a possible option to renew prior to expiration for an additional multi-year period. The typical license agreement requires that the licensee pay us the greater of a royalty based on a percentage of the licensee’s net sales of licensed products or a guaranteed annual minimum royalty that typically increases over the term of the license agreement. In addition, several of our key license agreements provide for specified, fixed cash rights payments over and above our normal, ongoing royalty payments. Generally, licensees are required to spend a percentage of the net sales of licensed products for advertising and promotion of the licensed products and in many cases we place the ads on behalf of the licensee and are reimbursed. Additionally, licensees also make contributions to advertising funds, as a percentage of their sales, or may elect to increase their contribution to support specific brand-building initiatives.
In addition, to protect and increase the value of our trademarks, our license agreements include strict quality control and manufacturing standards. Our licensing personnel in the U.S., Europe and Asia meet regularly with licensees to ensure consistency with our overall merchandising and design strategies in order to protect the GUESS? trademarks and brand. As part of this process, our licensing department reviews in advance GUESS? third party licensed products, advertising and promotional materials.
We strategically reposition our existing licensing portfolio by monitoring and evaluating the performance of our licensees worldwide. For instance, between 2005 and 2013, we acquired several of our European apparel licensees. As a result, we now directly manage our adult and children’s apparel businesses in Europe.
Strategic Partnerships
We evaluate opportunities for strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall strategic initiatives and/or will take advantage of economies of scale. Similarly, when existing investments and alliances no longer align with strategic initiatives or as other circumstances warrant, we will evaluate various exit opportunities.
During fiscal 2017, we acquired the remaining 40% interest in our now wholly-owned subsidiary, Guess Sud SAS (“Guess Sud”), which is based in France. During fiscal 2017, we also sold our minority interest equity holding in a privately-held boutique apparel company. During fiscal 2016, we entered into a majority-owned joint venture in Russia to accelerate our expansion in this country. During fiscal 2014, we entered into a majority-owned joint venture which oversees the development of our retail and wholesale channels in Brazil. During fiscal 2013, we entered into a majority-owned joint venture in Portugal with a licensee partner to further expand in this region. In fiscal 2010, we entered into a majority-owned joint venture in the Canary Islands with licensee partners to open new free standing retail stores in this region. In 2006, we entered into a majority-owned joint venture to oversee the revitalization and expansion of our retail and wholesale channels in Mexico.
Design
GUESS?, G by GUESS and MARCIANO apparel products are designed by their own separate in-house design teams located in the U.S., Switzerland and South Korea. The U.S. and Switzerland teams collaborate to share ideas for products that can be sold throughout our global markets and are inspired by our GUESS? heritage. Our design teams seek to identify global fashion trends and interpret them for the style-conscious consumer while retaining the distinctive GUESS? image. They travel throughout the world in order to monitor fashion trends and discover new fabrics. These fabrics, together with the trends observed by our designers, serve as the primary source of inspiration for our lines and collections. We also maintain a fashion library consisting of vintage and contemporary garments as another source of creative concepts. In addition, our design teams work closely with members of our sales, merchandising and retail operations teams to further refine our products to meet the particular needs of our markets.
Global Sourcing and Supply Chain
We source products through numerous suppliers, many of whom have established long-term relationships with us. We seek to achieve efficient and timely delivery of our products, combining global and local sourcing. Almost all of our products are acquired as package purchases where we design and source product and the vendor delivers the finished product.
We are executing on the following supply chain initiatives to drive improvements in product costs: (i) developing a sourcing network in new territories that can offer better costs; (ii) consolidating and building strategic partnerships with high-quality suppliers to gain scale efficiencies; and (iii) implementing a global fabric platforming process for
each of the regional design offices to develop and utilize common fabrics across multiple styles creating a consistently high quality global offer for our wholesale and retail customers.
We believe that our balanced global supply chain, with deep vendor partnerships, provides us with a competitive advantage where we have the flexibility to respond to increased demand throughout the world. Our sourcing strategy provides us with the opportunity to leverage costs and improve speed-to-market.
As an ongoing strategic initiative, we leave
a larger portion of our buys open prior to each season to improve the efficiency of our speed-to-market by allowing us to design and produce closer to market delivery
. This allows us to better react to emerging fashion trends in the market.
We are also working to shorten our lead times through partnering with our suppliers, exercising agility in the production process and continuously searching for new suppliers and sourcing opportunities in reaction to the latest trends.
Additionally, offering an assortment of global products continues to be an area of focus. As a global brand, we maintain skilled sourcing teams in North America, Europe and Asia.
We are committed to sourcing our products in a responsible manner, respecting both the countries in which we conduct business and the business partners that produce our products. As a part of this commitment, we have implemented a global social compliance program that applies to our business partners. Although local customs vary in different regions of the world, we believe that the issues of business ethics, human rights, health, safety and environmental stewardship transcend geographical boundaries.
To support and ensure our social compliance, we communicate our expectations to our partners throughout our global supply chain and conduct compliance audits. If deficiencies are discovered, personnel in each region are empowered to work with the respective business partner to take a corrective course of action. Additionally, the goal of this process is to educate individuals, build strategic relationships and improve business practices over the long-term.
Advertising and Marketing
Our advertising, public relations and marketing strategy is designed to promote a consistent high impact image which endures regardless of changing consumer trends. While our advertising promotes products, the primary emphasis is on brand image.
Since our inception, Paul Marciano, our Executive Chairman of the Board and Chief Creative Officer, has had principal responsibility for the GUESS? brand image and creative vision. Under the direction of Mr. Marciano, our Los Angeles-based advertising department is responsible for overseeing all worldwide advertising. Throughout our history, we have maintained a high degree of consistency in our advertisements by using similar themes and images, including our signature black and white print advertisements and iconic logos.
We deploy a variety of media focused on national and international contemporary fashion/beauty, lifestyle and celebrity outlets. In recent years, we have also expanded our efforts into influencer marketing, digital advertising with leading fashion and lifestyle websites and advertising on social media platforms including Facebook, Instagram, Twitter, Pinterest, Reddit, Snapchat and global search engines. Our smartphone application provides a unique mobile media experience by combining fashion, e-commerce, personalized product recommendations, targeted promotions and social loyalty rewards to drive mobile brand engagement.
We also require our licensees and distributors to invest a percentage of their net sales of licensed products and net purchases of GUESS? products in Company-approved advertising, promotion and marketing. By retaining control over our advertising programs, we are able to maintain the integrity of our brands while realizing substantial cost savings compared to outside agencies.
We will continue to regularly assess and implement marketing initiatives that we believe will build brand equity and grow our business by investing in marketing programs to build awareness and drive customer traffic to our stores, websites and smartphone application. We plan to further strengthen communications with customers through an emphasis on digital marketing, and through our websites, loyalty programs, direct catalog and marketing mailings. We also plan to strengthen communities on various social media platforms, which enable us to provide timely information in an entertaining fashion to consumers about our history, products, special events, promotions and store locations, and allow us to receive and respond directly to customer feedback.
As part of these initiatives, we currently have loyalty programs in North America, Europe and Asia with millions of members covering all of our brands. These programs reward our members who earn points for purchases that can be redeemed on future purchases either in our stores or online. In addition to earning rewards with the program, our loyalty members receive other benefits including invitations to special VIP events in our stores, double points during their birthday month and access to seasonal savings. During fiscal 2018, our Guess List loyalty program experienced growth in its overall member engagement numbers through the introduction of experiential rewards and unique member content. In addition to this, we use these programs to promote new products to our customers which in turn increases traffic in the stores and online. We believe that the loyalty programs generate substantial repeat business that might otherwise go to competing brands. We continue to enhance our loyalty program offerings by understanding our members’ interests and needs, and strategically marketing to this large and growing customer base.
Quality Control
Our quality control program is designed to ensure that products meet our high quality standards. We test the quality of our raw materials prior to production and inspect prototypes of each product before production runs commence. We also perform random in-line quality control checks during and after production before the garments leave the contractor. Final random inspections occur when the garments are received in our distribution centers. We believe that our policy of inspecting our products is important to maintain the quality, consistency and reputation of our products.
Logistics
We utilize distribution centers at strategically located sites. The Company’s U.S. distribution center is based in Louisville, Kentucky.
Distribution of our products in Canada is handled primarily from
Company operated
distribution centers in Montreal, Quebec.
At our distribution facilities in the U.S. and Canada, we use fully integrated and automated distribution systems. The bar code scanning of merchandise and distribution cartons, together with radio frequency communications, provide timely, controlled, accurate and instantaneous updates to our distribution information systems.
Distribution of our products in Europe has been handled primarily through a
third party distribution center in Piacenza, Italy
.
During fiscal 2018, the Company began relocating its European distribution center from its Italy location to a new facility located in Venlo, Netherlands. The Company expects to complete its transition to the new distribution center in the Netherlands during fiscal 2019.
Additionally, we utilize several third party operated distribution warehouses that service the Asia region.
Competition
The apparel industry is highly competitive and fragmented and is subject to rapidly changing consumer demands and preferences. We believe that our success depends in large part upon our ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner and upon the continued appeal to consumers of the GUESS? brand. We compete with numerous apparel retailers, manufacturers and distributors, both domestically and internationally, as well as several well-known designers. Our licensed apparel and accessories also compete with a substantial number of well-known brands. Although the level and nature of competition differs among our product categories and geographic regions, we believe that we differentiate ourselves from our competitors by offering a global lifestyle brand on the basis of our global brand image and wide product assortment comprising both apparel and accessories. We also believe that our geographic diversification, multiple distribution channels and multiple store concepts help to set us apart from our competition.
Information Systems
We believe that high levels of automation and technology are essential to maintain our competitive position and support our strategic objectives and we continue to invest in and update computer hardware, network infrastructure, system applications and cyber security. Our computer information systems consist of a full range of financial, distribution, merchandising, point-of-sales, customer relationship management, supply chain, digital platform, enterprise resource planning and other systems. During fiscal
2018
, key initiatives included digital platform improvement and stabilization, the further development of mobile-based initiatives to support both our wholesale and direct-to-consumer businesses, various multi-channel initiatives and continued enhancements of our product lifecycle management system to facilitate vendor collaboration and increase the efficiency of the supply chain. In addition, we continue to enhance our systems to align with our global IT standards, accommodate future growth and provide operational efficiencies.
Trademarks
We own numerous trademarks,
including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, MARCIANO, Question Mark and Triangle Design, a stylized G and a stylized M, GUESS Kids, Baby GUESS, YES, G by GUESS, GUESS by MARCIANO and Gc.
As of
February 3, 2018
, we had over 4,700 U.S. and internationally registered trademarks or trademark applications pending with the trademark offices in over 175 countries around the world, including the U.S. From time-to-time, we adopt new trademarks in connection with the marketing of our product lines. We consider our trademarks to have significant value in the marketing of our products and act aggressively to register and protect our trademarks worldwide.
Like many well-known brands, our trademarks are subject to infringement. We have staff devoted to the monitoring and aggressive protection of our trademarks worldwide.
Wholesale Backlog
We generally receive orders 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.
U.S. and Canada Backlog.
Our U.S. and Canadian wholesale backlog as of March 26,
2018
, consisting primarily of orders for fashion apparel, was $38.2 million in constant currency, compared to $41.3 million at March 27,
2017
, a decrease of 7.7%. We estimate that if we were to normalize the orders for the scheduling of market weeks, the current backlog would have increased by 2.2% compared to the prior year.
Europe Backlog.
As of
March 25,
2018
, the European wholesale backlog was €233.0 million, compared to €196.5 million at March 26,
2017
, an increase of 18.6%. The backlog as of
March 25,
2018
is primarily comprised of sales orders for the Spring/Summer
2018
and Fall/Winter
2018
seasons.
Employees
As of February
2018
, we had approximately 14,700 associates, both full and part-time, consisting of approximately 6,200 in the U.S. and 8,500 in foreign countries. The number of our employees fluctuates during the year based on seasonal needs. In some international markets, local laws provide for employee representation by organizations similar to unions and some of our international employees are covered by trade-sponsored or governmental bargaining arrangements. We consider our relationship with our associates to be good.
Environmental and Other Sustainability Matters
We and our licensing partners and suppliers are subject to federal, state, local and foreign laws, regulations and ordinances that govern activities or operations that may have adverse environmental effects (such as emissions to air, discharges to water, and the generation, handling, storage and disposal of solid and hazardous wastes). We are also subject to laws, regulations and ordinances that impose liability for the costs of clean up or other remediation of contaminated property, including damages from spills, disposals or other releases of hazardous substances or wastes, in certain circumstances without regard to fault. Certain of our operations and those of our licensing partners and suppliers routinely involve the handling of chemicals and wastes, some of which are or may become regulated as hazardous substances. We have not incurred, and do not expect to incur, any significant expenditures or liabilities for environmental matters. As a result, we believe that our environmental obligations will not have a material adverse effect on our consolidated financial condition or results of operations.
Website Access to Our Periodic SEC Reports
Our investor website can be found at
http://investors.guess.com
. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act, are available at our investor website, free of charge, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, the charters of our Board of Directors’ Audit, Compensation and Nominating and Governance Committees, as well as the Board of Directors’ Governance Guidelines and our Code of Ethics are posted on our investor website. We may from time-to-time provide important disclosures to our investors, including amendments or waivers to our Code of Ethics, by posting them on our investor website, as permitted by SEC rules. Printed copies of these documents may also be obtained by writing or telephoning us at: Guess?, Inc., 1444 South Alameda Street, Los Angeles, California 90021, Attention: Investor Relations, (213) 765-5578.
We have included our Internet website addresses throughout this filing as textual references only. The information contained within these websites is not incorporated into this Annual Report on Form 10-K.
ITEM 1A. Risk Factors.
You should carefully consider the following factors and other information in this Annual Report on Form 10‑K. Additional risks which we do not presently consider material, or of which we are not currently aware, may also have an adverse impact on us. Please also see “Important Factors Regarding Forward-Looking Statements” on page (ii).
Demand for our merchandise may decrease and the appeal of our brand image may diminish if we fail to identify and rapidly respond to consumers’ fashion tastes.
The apparel industry is subject to rapidly evolving fashion trends and shifting consumer demands. Accordingly, our brand image and our profitability are heavily dependent upon both the priority our target customers place on fashion and our ability to anticipate, identify and capitalize upon emerging fashion trends. Current fashion tastes place significant emphasis on a fashionable look. In the past, this emphasis has increased and decreased through fashion cycles. If we fail to anticipate, identify or react appropriately, or in a timely manner, to fashion trends, we could experience reduced consumer acceptance of our products and a diminished brand image. These factors could result in higher wholesale markdowns, lower average unit retail prices, lower product margins and decreased sales volumes for our products and could have a material adverse effect on our results of operations and financial condition.
The apparel industry is highly competitive, and we may face difficulties competing successfully in the future.
We operate in a highly competitive and fragmented industry with low barriers to entry. We compete with many apparel manufacturers and distributors, both domestically and internationally, as well as many well-known designers. We compete with many other retailers (both brick and mortar and e-commerce sites), including department stores, some of whom are our major wholesale customers. Our licensed apparel and accessories compete with many well-known brands. Within each of our geographic markets, we also face significant competition from global and regional branded apparel companies, as well as retailers that market apparel under their own labels. These and other competitors pose significant challenges to our market share in our existing major domestic and foreign markets and to our ability to successfully develop new markets. Some of our competitors have competitive advantages over us, including greater financial and marketing resources, higher wage rates, lower prices, more desirable store locations, greater online and e-commerce presence and faster speed-to-market. In addition, our larger competitors may be better equipped than us to adapt to changing conditions that affect the competitive market and newer competitors may be viewed as more desirable by fashion conscious consumers. Also, in most countries, the industry’s low barriers to entry allow the introduction of new products or new competitors at a fast pace. In other countries, high import duties may favor locally produced products. Any of these competition-related factors could result in reductions in sales or prices of our products and could have a material adverse effect on our results of operations and financial condition.
Slowing customer traffic in malls or outlet centers could significantly reduce our sales, increase pressure on our margins and leave us with excess inventory.
Unfavorable economic conditions, changing shopping patterns, including significant increases in e-commerce sales, changing demographic patterns and other factors have adversely affected customer traffic in mall and outlet centers, particularly in North America. This, in turn, has resulted in significant pricing pressures and a highly promotional retail environment in the apparel sector. Should these trends occur in our international business, or continue or worsen in North America, it could negatively impact our sales, increase pressure on our margins, leave us with excess inventory, cause a decline in profits and negatively impact our liquidity.
Poor or uncertain economic conditions, and the resulting negative impact on consumer confidence and spending, have had and could in the future have an adverse effect on our business, prospects, operating results, financial condition and cash flows.
The apparel industry is cyclical in nature and is particularly affected by adverse trends in the general economy. Purchases of apparel and related merchandise are generally discretionary and therefore tend to decline during periods of economic uncertainty and recession, but may also decline at other times. Over the last several years, volatile economic conditions and uncertain market conditions in many markets around the world have resulted in cautious consumer spending. For example, a number of European countries experienced difficult economic conditions, including sovereign debt issues that negatively impacted the capital markets. These conditions resulted in reduced consumer confidence and spending in many countries in Europe, particularly Southern Europe. While these conditions have recently improved, if conditions in Europe, or other economic regions in which we do business, worsen or fail to further improve, there will likely be a negative impact on our business, prospects, operating results, financial condition and cash flows.
In addition to the factors contributing to the current economic environment, there are a number of other factors that could contribute to reduced levels of consumer spending, such as increases in interest rates, currency fluctuations, inflation, unemployment, consumer debt levels, inclement weather, taxation rates, net worth reductions based on market declines or uncertainty, energy prices and austerity measures. Similarly, natural disasters, labor unrest, actual or potential terrorist acts, geopolitical unrest and other conflicts can also create significant instability and uncertainty in the world, causing consumers to defer purchases and travel, or prevent our suppliers and service providers from providing required services or materials to us. These or other factors could materially and adversely affect our business, prospects, operating results, financial condition and cash flows. Uncertainty surrounding potential U.S. policies related to immigration, global trade, taxation and other matters could amplify many of these risks and potential impacts.
Difficulties in the credit markets could have a negative impact on our customers, suppliers and business partners, which, in turn could materially and adversely affect our results of operations and liquidity.
The impact of difficult credit conditions on our customers, business partners, suppliers, insurance providers and financial institutions with which we do business cannot be predicted and may be quite severe. The inability of our manufacturers to ship our products could impair our ability to meet delivery date requirements. A disruption in the ability of our significant customers, distributors or licensees to access liquidity could cause serious disruptions or an overall deterioration of their businesses. A disruption in the ability of a large group of our smaller customers to access liquidity could have similar adverse effects, particularly in our important multi-brand wholesale channel in Southern Europe, where many customers tend to be relatively small and not well capitalized. These conditions could lead to significant reductions in future orders of our products and the inability or failure on our customers’ part to meet their payment obligations to us, any of which could have a material adverse effect on our results of operations and liquidity.
Similarly, a failure on the part of our insurance providers to meet their obligations for claims made by us could have a material adverse effect on our results of operations and liquidity. Continued market difficulties or additional deterioration could jeopardize our ability to rely on those financial institutions that are parties to our various bank facilities and foreign exchange contracts. We could be exposed to a loss if the counterparty fails to meet its obligations upon our exercise of foreign exchange contracts. In addition, instability or other distress in the financial markets could impair the ability of one or more of the banks participating in our credit agreements from honoring its
commitments. This could have an adverse effect on our business if we were not able to replace those commitments or to locate other sources of liquidity on acceptable terms.
Domestic and foreign currency fluctuations could adversely impact our financial condition, results of operations and earnings.
Since the majority of our international
operations
are conducted in currencies other than the U.S. dollar (primarily the euro, Canadian dollar, Korean won, Chinese yuan, Mexican peso and Russian rouble), currency fluctuations can have a significant impact on the translation of our international revenues and earnings into U.S. dollar amounts.
These amounts could be materially affected by the strengthening of the U.S. dollar, negatively impacting our results of operations, earnings and our ability to generate revenue growth. Furthermore, our products are typically sourced in U.S. dollars. As a result, the cost of these products may be affected by changes in the value of the applicable local currencies. Changes in currency exchange rates may also affect the U.S. dollar value of the foreign currency denominated prices at which our international businesses sell products. Our future financial results could be significantly affected by not only the value of the U.S. dollar in relation to the foreign currencies in which we conduct business, but also the speed at which these fluctuations occur.
If the U.S. dollar strengthens relative to the respective fiscal 2018 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results as well as our international cash and other balance sheet items during fiscal 2019, particularly in Canada, Europe and Mexico.
Although we hedge certain exposures to changes in foreign currency exchange rates, we cannot assure that foreign currency fluctuations will not have a material adverse effect on our financial condition or results of operations. Furthermore, since some of our hedging activities are designed to reduce volatility of fluctuating exchange rates, they not only reduce the negative impact of a stronger U.S. dollar, but they also reduce the positive impact of a weaker U.S. dollar. In addition, while our foreign currency hedges are designed to reduce volatility over the forward contract period, these contracts can create volatility during the period. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities.
Fluctuations in the price or availability of quality raw materials and commodities could increase costs and negatively impact profitability.
The raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high demand for fabrics, currency fluctuations, crop yields, weather patterns, supply conditions, government regulations (including tariffs), labor conditions, energy costs, transportation or freight costs, economic climate, market speculation and other unpredictable factors. Negative trends in any of these conditions or our inability to appropriately project fabric requirements in the future could increase costs and negatively impact profitability.
We are subject to periodic litigation and other regulatory proceedings, which could result in unexpected obligations, as well as the diversion of time and resources.
We are involved from time-to-time in various U.S. and foreign lawsuits relating to our business, including purported class action lawsuits and intellectual property claims. In addition, we can be subject to regulatory scrutiny which may result in regulatory proceedings, including the current investigation by the European Commission regarding the potential breach of certain European Union competition rules by the Company. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such new or existing proceedings. Should management’s evaluation of any such claims or proceedings or the likelihood of any future claims or proceedings prove incorrect, our exposure could materially exceed expectations, adversely impacting our business, financial condition and results of operations. In addition, any significant litigation or regulatory matters, regardless of the merits, could divert management’s attention from our operations and result in substantial legal fees.
See also “Item 3. Legal Proceedings” for further discussion of our legal matters.
We could find that we are carrying excess inventories if we fail to shorten lead-times or anticipate consumer demand, if our international vendors do not supply quality products on a timely basis, if our merchandising strategies fail or if we do not open new and remodel existing stores on schedule.
Although we have shortened lead-times for the design, production and development of a portion of our product lines, we expect to continue to place orders with our vendors for most of our products a season or more in advance. If we are not successful in our efforts to continue to shorten lead-times or if we fail to correctly anticipate fashion
trends or consumer demand, we could end up carrying excess inventories. Even if we effectively shorten lead-times and correctly anticipate consumer fashion trends and demand, our vendors could fail to supply the quality products and materials we require at the time we need them. Moreover, we could fail to effectively market or merchandise these products once we receive them. In addition, we could fail to open new or remodeled stores on schedule, and inventory purchases made in anticipation of such store openings could remain unsold. Any of the above factors could cause us to experience excess inventories, which may result in inventory write-downs and more markdowns, which in turn could have a material adverse effect on our results of operations and financial condition.
Our success depends on the strength of our relationships with our suppliers and manufacturers.
We do not own or operate any production facilities, and we depend on independent factories to supply our fabrics and to manufacture our products to our specifications. We do not have long-term contracts with any suppliers or manufacturers, and our business is dependent on our partnerships with our vendors. If manufacturing costs were to rise significantly, our product margins and results of operations could be negatively affected. In addition, very few of our vendors manufacture our products exclusively. As a result, we compete with other companies for the production capacity of independent contractors. If our vendors fail to ship our fabrics or products on time or to meet our quality standards or are unable to fill our orders, we might not be able to deliver products to our retail stores and wholesale customers on time or at all.
Moreover, our suppliers have at times been unable to deliver finished products in a timely fashion. This has led, from time-to-time, to an increase in our inventory, creating potential markdowns and a resulting decrease in our profitability. As there are a finite number of skilled manufacturers that meet our requirements, it could take significant
time to identify and qualify suitable alternatives, which could result in our missing retailing seasons or our wholesale customers canceling orders, refusing to accept deliveries or requiring that we lower selling prices. Since we prefer not to return merchandise to our manufacturers, we could also have a considerable amount of unsold merchandise. Any of these problems could harm our financial condition and results of operations.
Our Americas Wholesale business is highly concentrated. If any of our large customers decrease their purchases of our products or experience financial difficulties, our results of operations and financial condition could be adversely affected.
In fiscal
2018
, our
two
largest wholesale customers accounted for a total of approximately
2.2%
of our consolidated net revenue
.
No other single customer or group of related customers in any of our segments accounted for more than 1.0% of our consolidated net revenue in fiscal
2018
. Continued consolidation in the retail industry could further decrease the number of, or concentrate the ownership of, stores that carry our products and our licensees’ products. In recent years, there has been a significant increase in the number of designer brands seeking placement in department stores, which makes any one brand potentially less attractive to department stores. If any one of our major wholesale customers decides to decrease purchases from us, to stop carrying GUESS? products or to carry our products only on terms less favorable to us, our sales and profitability could significantly decrease. Similarly, some retailers have recently experienced significant financial difficulties, which in some cases have resulted in bankruptcy, liquidation and store closures.
Financial difficulties of one of our major customers could result in reduced business and higher credit risk with respect to that customer.
Any of these circumstances could ultimately have a material adverse effect on our results of operations and financial condition.
Our inability to protect our reputation could have a material adverse effect on our brand.
Our ability to maintain our reputation is critical to our brand. Our reputation could be jeopardized if we or our third party providers fail to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure by us or our third party providers to comply with ethical, social, product, labor, health and safety or environmental standards could also jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts. With the increased proliferation of social media, public perception about our products, our stores or our brand, whether justified or not, could significantly impair our reputation, involve us in litigation, damage our brand and have a material adverse effect on our business. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations and financial condition, as well as require additional resources to rebuild our reputation.
Since we do not control our licensees’ actions and we depend on our licensees for a substantial portion of our earnings from operations, their conduct could harm our business.
We license to others the rights to produce and market certain products that are sold with our trademarks. While we retain significant control over our licensees’ products and advertising, we rely on our licensees for, among other things, operational and financial control over their businesses. If the quality, focus, image or distribution of our licensed products diminish, consumer acceptance of and demand for the GUESS? brands and products could decline. This could materially and adversely affect our business and results of operations.
In fiscal
2018
, approximately
80%
of our net royalties were derived from our top five licensed product lines. A decrease in customer demand for any of these product lines could have a material adverse effect on our results of operations and financial condition. Although we believe that in most circumstances we could replace existing licensees if necessary, our inability to do so effectively or for any period of time could adversely affect our revenues and results of operations.
We depend on our intellectual property, and our methods of protecting it may not be adequate.
Our success and competitive position depend significantly upon our trademarks and other proprietary rights. We take steps to establish and protect our trademarks worldwide. Despite any precautions we may take to protect our intellectual property, policing unauthorized use of our intellectual property is difficult, expensive and time consuming, and we may be unable to adequately protect our intellectual property or to determine the extent of any unauthorized use, particularly in those foreign countries where the laws do not protect proprietary rights as fully as in the U.S. We also place significant value on our trade dress and the overall appearance and image of our products. However, we cannot assure you that we can prevent imitation of our products by others or prevent others from seeking to block sales of GUESS? products for purported violations of their trademarks and proprietary rights. We also cannot assure you that others will not assert rights in, or ownership of, trademarks and other proprietary rights of GUESS?, that our proprietary rights would be upheld if challenged or that we would, in that event, not be prevented from using our trademarks, any of which could have a material adverse effect on our financial condition and results of operations. Further, we could incur substantial costs in legal actions relating to our use of intellectual property or the use of our intellectual property by others. Even if we are successful in such actions, the costs we incur could have a material adverse effect on us.
If we fail to successfully execute growth initiatives, including acquisitions and alliances, our business and results of operations could be harmed.
We regularly evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives. Our historical acquisitions include our former European jeanswear licensee in 2005, our former European licensee of children’s apparel in 2008 and our former European licensee of MARCIANO apparel in 2012. In addition, we have entered into joint venture relationships with partners in Brazil, the Canary Islands, Mexico, Portugal and Russia and have been directly operating our South Korea and China businesses since 2007, our international jewelry business since 2010, our Japan business starting in 2013 and our retail businesses in Australia and Singapore since 2017.
These efforts place increased demands on our managerial, operational and administrative resources that could prevent or delay the successful opening of new stores and the identification of suitable licensee partners, adversely impact the performance of our existing stores and adversely impact our overall results of operations. In addition, acquired businesses and additional store openings may not provide us with increased business opportunities, or result in the growth that we anticipate, particularly during economic downturns. Furthermore, integrating acquired operations (including operations from existing licensees or joint venture partners) is a complex, time-consuming and expensive process. Failing to acquire and successfully integrate complementary businesses, or failing to achieve the business synergies or other anticipated benefits of acquisitions or joint ventures, could materially adversely affect our business and results of operations.
We may be unsuccessful in implementing our plans to open and operate new stores, which could harm our business and negatively affect our results of operations.
New store openings have historically been an important part of the growth of our business. To open and operate new stores successfully, we must:
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identify desirable locations, the availability of which is out of our control;
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negotiate acceptable lease terms, including desired tenant improvement allowances;
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efficiently build and equip the new stores;
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source sufficient levels of inventory to meet the needs of the new stores;
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hire, train and retain competent store personnel;
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successfully integrate the new stores into our existing systems and operations; and
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satisfy the fashion preferences of customers in the new geographic areas.
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Any of these challenges could delay our store openings, prevent us from completing our store opening plans or hinder the operations of stores we do open. These challenges could be even more pronounced in foreign markets, including markets where we have identified opportunities for store growth such as China, Russia and Turkey, due to unfamiliar local regulations, business conditions and other factors. Once open, we cannot be sure that our new stores will be profitable. Such things as unfavorable economic and business conditions and changing consumer preferences could also interfere with our store opening plans.
Failure to successfully develop and manage new store design concepts could adversely affect our results of operations.
The introduction and growth or maintenance of new store design concepts as part of our overall growth and productivity strategies could strain our financial and management resources and is subject to a number of other risks, including customer acceptance, product differentiation, competition and maintaining desirable locations. These risks may be compounded during the current difficult economic climate or any future economic downturn. There can be no assurance that new store designs will achieve or maintain sales and profitability levels that justify the required investments. If we are unable to successfully develop new store designs, or if consumers are not receptive to the products, design layout, or visual merchandising, our results of operations and financial results could be adversely affected. In addition, the failure of new store designs to achieve acceptable results could lead to unplanned store closures and/or impairment and other charges, which could adversely affect our results of operations and ability to grow.
We may not fully realize expected cost savings and/or operating efficiencies related to restructuring plans or other cost-saving initiatives.
In fiscal 2017, we implemented a global cost reduction and restructuring plan to better align our global cost and organizational structure with our current strategic initiatives. This plan included the consolidation and streamlining of our business processes and a reduction in our global workforce and other expenses. We have forecasted cost savings from this plan, supply chain and other initiatives, based on a number of assumptions and expectations which, if achieved, would improve our profitability and cash flows from operating activities. However, there can be no assurance that the expected results will be achieved. These and any future spend reductions, if any, may negatively impact our other initiatives or our efforts to grow our business, which may negatively impact our future results of operations and increase the burden on existing management, systems and resources. In addition, these cost savings may be negated or offset by unexpected or increased costs and poorer performance in other areas of the business.
Changes in subjective assumptions, estimates and judgments by management related to complex tax matters, including those resulting from regulatory reviews, could adversely affect our financial results.
We are subject to routine tax audits on various tax matters around the world in the ordinary course of business (including income tax, business tax, customs duties and Value Added Tax (“VAT”) matters). We regularly assess the adequacy of our uncertain tax positions and other reserves, which requires a significant amount of judgment. Although we accrue for uncertain tax positions and other reserves, the results of regulatory audits and negotiations with taxing and customs authorities may be in excess of our accruals, resulting in the payment of additional taxes, duties, penalties and interest. See Note
11
to the Consolidated Financial Statements for further discussion of our tax matters, including reserves for uncertain tax positions.
From time-to-time, we make VAT and other tax-related refund claims with various foreign tax authorities that are audited by those authorities for compliance. Failure by these foreign governments to approve or ultimately pay these claims could have a material adverse effect on our results of operations and liquidity.
Changes in tax laws, significant shifts in the relative source of our earnings, or other unanticipated tax liabilities could adversely affect our effective income tax rate and profitability and may result in volatility in our financial results.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change. We record tax expense based on our estimate of future payments, which include reserves for uncertain tax positions in multiple tax jurisdictions and requires significant judgment in evaluating and estimating our provision and accruals. Our effective income tax rate in the future could be affected by a number of other factors, including: the outcome of income tax audits in various jurisdictions around the world, changes in our stock price, the resolution of uncertain tax positions and changes in our operating structure. We and our subsidiaries are engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe that these transactions reflect arm’s length terms and that the proper transfer pricing documentation is in place, these transfer pricing terms and conditions may be scrutinized by local tax authorities during an audit and any resulting changes may impact our mix of earnings in countries with differing statutory tax rates. In addition, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, as well as losses in jurisdictions where we are unable to realize the related tax benefits, can create volatility in our effective income tax rate. Any one of these factors could adversely impact our income tax rate and our profitability and could create ongoing variability in our quarterly or annual tax rates.
In addition, a number of countries are actively discussing or making changes to their tax laws and the reporting applicable to corporate multinationals, such as the recently enacted
2017 Tax Cuts and Jobs Act in the U.S. (referred to herein as the “Tax Reform”)
. Foreign governments may enact laws in response to the Tax Reform that could result in further changes to global taxation and materially affect our financial position and results of operations.
The Tax Reform significantly changes how the U.S. taxes corporations and requires complex computations to be performed that were not previously required in U.S. tax law. Interpretation of the provisions of the Tax Reform require significant judgment and estimates, which the IRS and other standard-setting bodies could interpret or issue additional guidance on how provisions of the Tax Reform should be applied that is different from our interpretation. As we evaluate additional interpretation and guidance, collect and prepare necessary data and complete our analysis, we may make adjustments to the provisional amounts we have recorded during fiscal 2018 that may materially impact our provision for income taxes in the future periods in which the adjustments are made.
Future changes to U.S. tax or trade policies impacting multi-national companies could materially affect our financial condition and results of operations.
During fiscal
2018
, we sourced most of our finished products with partners and suppliers outside the U.S. and we continued to design and purchase fabrics globally. In addition, over time we have increased our sales of product outside of the U.S. In fiscal
2018
, approximately
69%
of our consolidated net revenue was generated by sales from outside of the U.S. We anticipate that these international revenues will continue to grow as a percentage of our total business over time. The current political landscape has introduced greater uncertainty with respect to future tax and trade regulations for U.S. companies like ours with significant business and sourcing operations outside the U.S.
In addition, there have been recent changes to U.S. participation in, and discussions concerning the potential renegotiation of, certain international trade agreements. We cannot predict whether, and to what extent, there may be changes to such international trade agreements or whether quotas, duties, tariffs, exchange controls or other restrictions will be changed or imposed by the U.S. or by other countries. If we or our vendors or product licensees are unable to obtain raw materials or finished goods from the countries where we or they wish to purchase them, either because of such regulatory changes or for any other reason, or if the cost of doing so should increase, it could have a material adverse effect on our results of operations and financial condition.
Our business is global in scope and can be impacted by factors beyond our control.
As a result of our large and growing international operations, we face the possibility of greater losses from a number of risks inherent in doing business in international markets and from a number of factors which are beyond our control. Such factors that could harm our results of operations and financial condition include, among other things:
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political instability or acts of terrorism, which disrupt trade with the countries where we operate or in which our contractors, suppliers or customers are located;
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recessions in foreign economies;
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inflationary pressures and volatility in foreign economies;
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reduced global demand resulting in the closing of manufacturing facilities;
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challenges in managing broadly dispersed foreign operations;
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local business practices that do not conform to legal or ethical guidelines;
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adoption of additional or revised quotas, restrictions or regulations relating to imports or exports;
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additional or increased customs duties, tariffs, taxes and other charges on imports or exports;
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anti-American sentiment in foreign countries where we operate resulting from actual or proposed changes to U.S. immigration and travel policies or other factors;
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delays in receipts due to our distribution centers as a result of labor unrest, increasing security requirements or other factors at U.S. or other ports;
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significant fluctuations in the value of the dollar against foreign currencies;
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increased difficulty in protecting our intellectual property rights in foreign jurisdictions;
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social, labor, legal or economic instability in the foreign markets in which we do business, which could influence our ability to sell our products in, or distribute our products from, these international markets;
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restrictions on the transfer of funds between the U.S. and foreign jurisdictions;
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our ability and the ability of our international retail store licensees, distributors and joint venture partners to locate and continue to open desirable new retail locations; and
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natural disasters in areas in which our contractors, suppliers, or customers are located.
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Further, our international presence means that we are subject to certain U.S. laws, including the Foreign Corrupt Practices Act, as well as the laws of the foreign countries in which we operate, including data privacy laws. If any of our international operations, or our employees or agents, violates such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results.
Violation of laws or regulations, or changes to existing laws or regulations could adversely affect our business, reputation and results of operations.
We are subject to numerous laws and regulations at the state, federal and international levels, including, but not limited to, the areas of health care, taxes, transportation and logistics, data privacy, the environment, trade, conflict minerals, product safety, employment and labor, advertising and pricing practices, consumer protection, e-commerce, anti-competition, anti-corruption and intellectual property. Compliance with these numerous laws and regulations is complicated, time consuming and expensive. In addition, the laws may be inconsistent from jurisdiction to jurisdiction and are subject to change from time to time, sometimes unexpectedly. Failure to comply or to effectively anticipate changes in such laws or regulations could have a material adverse effect on our business, reputation and results of operations.
Violation of labor, environmental and other laws and practices by our licensees or suppliers could harm our business.
We require our licensing partners and suppliers to operate in compliance with applicable laws and regulations. While our internal and vendor operating guidelines, code of conduct and monitoring programs promote ethical business practices and compliance with laws, we do not control our licensees or suppliers or their labor, environmental, safety or other business practices. The violation of labor, environmental, safety or other laws by any of our licensees or suppliers, or divergence of a licensee’s or supplier’s business practices or social responsibility standards from ours or from those generally accepted as ethical in the U.S., could interrupt or otherwise disrupt the shipment of our products, harm the value of our trademarks, damage our reputation or expose us to potential liability for their wrongdoings.
Our business could suffer if our computer systems and websites are disrupted or cease to operate effectively.
The efficient operation of our business is very dependent on our computer and information systems. In particular, we rely heavily on our merchandise management and ERP systems used to track sales and inventory and manage our supply chain. In addition, we have e-commerce and other Internet websites worldwide. Given the complexity of our business and the significant number of transactions that we engage in on an annual basis, it is imperative that we maintain constant operation of our computer hardware and software systems. Despite our preventative efforts, our systems are vulnerable from time-to-time to damage or interruption from, among other things, ineffective upgrades or support from third party vendors, difficulties in replacing or integrating new systems, security breaches, computer viruses, natural disasters and power outages. Any such problems or interruptions could result in incorrect information being supplied to management, inefficient ordering and replenishment of products, loss of orders (including e-commerce orders), significant expenditures, disruption of our operations, inability to produce accurate financial statements, and other adverse impacts to our business.
A data privacy breach or failure to comply with data privacy laws could damage our reputation and customer relationships, expose us to litigation risk and potential fines and adversely affect our business.
As part of our normal operations, we collect, process, transmit and where appropriate, retain certain sensitive and confidential employee and customer information, including credit card information. There is significant concern by consumers and employees over the security of personal information, consumer identity theft and user privacy. Despite the security measures we have in place, our facilities and systems, and those of our third party service providers, may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. As a result of recent security breaches at a number of prominent retailers, the media and public scrutiny of information security and privacy has become more intense and the regulatory environment has become more uncertain. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us or our vendors, could result in significant legal and remediation expenses, severely damage our reputation and our customer relationships, harm sales, expose us to risks of litigation and liability and result in a material adverse effect on our business, financial condition and results of operations. Additionally, changing privacy laws in the United States, Europe and elsewhere, including the adoption by the European Union of the General Data Protection Regulation (“GDPR”), which becomes effective May 2018, creates new individual privacy rights and imposes increased obligations on companies handling personal data. Consequently, we may incur significant costs related to prevention and to comply with laws regarding the protection and unauthorized disclosure of personal information. A failure to comply with the stringent rules of the GDPR could result in fines of up to €20 million.
A significant disruption at any of our distribution facilities could have a material adverse impact on our sales and operating results.
Our U.S. business relies primarily on a single distribution center located in Louisville, Kentucky to receive, store and distribute merchandise to all of our U.S. retail stores, wholesale customers and e-commerce customers.
Distribution of our products in Canada is handled primarily from
two
distribution centers in Montreal, Quebec.
Distribution of our products in Europe has been handled primarily through a
third party distribution center in Piacenza, Italy
.
During fiscal 2018, the Company began relocating its European distribution center from its Italy location to a new facility located in Venlo, Netherlands. The Company expects to complete its transition to the new distribution center in the Netherlands during fiscal 2019.
Additionally, we utilize several third party operated distribution warehouses that service the Asia region.
Any significant interruption in the operation of any of our distribution centers due to natural disasters, weather conditions, accidents, system failures, capacity issues, labor issues, relationships with our third party warehouse operators or landlords, failure to successfully complete or delays in transitioning to new facilities, new providers, and/or new distribution systems or other unforeseen causes could have a material adverse effect on our ability to replace inventory and fill orders (including e-commerce orders), negatively impacting our sales, operating results and customer relations.
Failure to deliver merchandise timely to our distribution facilities and to our stores and wholesale customers could lead to disruptions to our business.
The efficient operation of our global retail and wholesale businesses depends on the timely importation and customs clearance, as well as receipt of merchandise to and from our regional distribution centers. We receive
merchandise at our distribution facilities and deliver merchandise to our stores and wholesale customers using independent third parties who import as well as transport goods. The independent third parties and other entities which they rely on have employees which may be represented by labor unions. Disruptions in the delivery of merchandise caused by importation delays or work stoppages by employees or contractors of any of these or other third parties could delay the timely receipt of merchandise. There can be no assurance that such stoppages, delays or disruptions will not occur in the future. Any failure by a third party to respond adequately to our distribution needs could disrupt our operations and negatively impact our financial condition or results of operations.
Abnormally harsh or unseasonable weather conditions could have a material adverse impact on our sales, inventory levels and operating results.
Extreme weather conditions in areas in which our retail stores and wholesale doors are located, particularly in markets where we have a concentration of locations, could adversely affect our business. For example, heavy snowfall, rainfall or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability. Our business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with those unseasonable conditions. Reduced sales from extreme or prolonged unseasonable weather conditions could have a material adverse effect on our results of operations, financial condition and cash flows.
Our results of operations could be affected by natural events in the locations in which we or our customers or suppliers operate.
Our corporate headquarters, as well as other key operational locations, including retail, distribution and warehousing facilities, are located in areas that are subject to natural disasters such as severe weather and geological events that could disrupt our operations. Many of our suppliers and customers also have operations in these locations. The occurrence of such natural events may result in sudden disruptions in business conditions of the local economies affected, as well as of the regional and global economies. Such disruptions could result in decreased demand for our products and disruptions in our management functions, sales channels and manufacturing and distribution networks, which could have a material adverse effect on our business, financial condition and results of operations.
Our Chairman Emeritus and our Executive Chairman and Chief Creative Officer own a significant percentage of our common stock. Their interests may differ from the interests of our other stockholders.
Maurice Marciano, our Chairman Emeritus and Board member, and Paul Marciano, our Executive Chairman, Chief Creative Officer and Board member, collectively beneficially own approximately 29% of our outstanding shares of common stock. The sale or prospect of the sale of a substantial number of these shares could have an adverse impact on the market price of our common stock. Moreover, these individuals may have different interests than our other stockholders and, accordingly, they may direct the operations of our business in a manner contrary to the interests of our other stockholders. As long as these individuals own a significant percentage of our common stock, they may effectively be able to:
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amend or prevent amendment of our Restated Certificate of Incorporation or Bylaws;
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effect or prevent a merger, sale and/or purchase of assets or other corporate transactions; and
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control the outcome of any other matter submitted to our stockholders for vote.
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Their stock ownership, together with the anti-takeover effects of certain provisions of applicable Delaware law and our Restated Certificate of Incorporation and Bylaws, may discourage acquisition bids or allow the Marcianos to delay or prevent a change in control that may be favored by our other stockholders, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our common stock price.
Our failure to retain our existing senior management team or to retain or attract other key personnel could adversely affect our business.
Our business requires disciplined execution at all levels of our organization in order to ensure the timely delivery of desirable merchandise in appropriate quantities to our stores and other customers. This execution requires experienced and talented management in various areas of our business including: advertising, design, finance, merchandising, operations, and production. Our success depends upon the personal efforts and abilities of our senior
management, particularly Victor Herrero, our Chief Executive Officer, Paul Marciano, our Executive Chairman and Chief Creative Officer, and other key personnel. Although we believe we have a strong management team with relevant industry expertise, the extended loss of the services of these or other key personnel and failure to effectively identify and attract suitable successors could materially harm our business.
A committee of the Board of Directors is conducting an investigation of allegations of improper conduct against Paul Marciano, our Executive Chairman and Chief Creative Officer.
As disclosed on February 9, 2018, Guess?, Inc., is investigating allegations of improper conduct against Paul Marciano, our Executive Chairman and Chief Creative Officer. The investigation is being continued and completed solely by Glaser Weil LLP as independent counsel on behalf of a Special Committee of the Board of Directors. Commencing on February 20, 2018, Mr. Marciano relinquished his day-to-day responsibilities to the Company, on an unpaid basis with the agreement of the Board of Directors. Although we believe we have a strong management team with relevant industry expertise, the extended loss of the services of Mr. Marciano and failure to effectively identify and attract a suitable successor could materially harm our business.
Fluctuations in quarterly performance including comparable store sales, sales per square foot, operating margins, timing of wholesale orders, royalty net revenue or other factors could have a material adverse effect on our earnings and our stock price.
Our quarterly results of operations for each of our business segments have fluctuated in the past and can be expected to fluctuate in the future. Further, if our international retail store expansion plans or anticipated closure of retail stores and other productivity initiatives in the Americas fail to meet our expected results, our overhead and other related expansion costs would increase without an offsetting increase in sales and net revenue. This could have a material adverse effect on our results of operations and financial condition, including but not limited to future impairments of store assets or goodwill.
Our net revenue and operating results have historically been lower in the first half of our fiscal year due to general seasonal trends in the apparel and retail industries. Our comparable store sales, quarterly results of operations and stock price can also be affected by a variety of other factors, including:
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shifts in consumer tastes and fashion trends;
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the timing of new store openings and the relative proportion of new stores to mature stores;
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the timing and effectiveness of planned store closures in North America;
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calendar shifts of holiday or seasonal periods;
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the timing of seasonal wholesale shipments;
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the effectiveness of our inventory management;
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changes in our merchandise mix;
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changes in our mix of revenues by segment;
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the timing of promotional events;
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actions by competitors;
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changes in the business environment;
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inflationary changes in prices and costs;
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changes in the payment of future cash dividends;
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changes in currency exchange rates;
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changes in patterns of commerce such as the expansion of e-commerce;
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the level of pre-operating expenses associated with new stores; and
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volatility in securities’ markets which could impact the value of our investments in non-operating assets.
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An unfavorable change in any of the above factors could have a material adverse effect on our results of operations and our stock price.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2. Properties.
As of
February 3, 2018
, all of our principal facilities were leased with the exception of our U.S. distribution center based in Louisville, Kentucky and our administrative office based in Florence, Italy. Certain information concerning our principal facilities is set forth below:
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Location
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Use
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Approximate
Area in
Square Feet
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Los Angeles, California
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Principal executive and administrative offices, design facilities, sales offices, warehouse facilities and sourcing used by our Americas Wholesale, Americas Retail, Corporate and Licensing support groups
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341,700
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Louisville, Kentucky
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Distribution and warehousing facility used by our Americas Wholesale and Americas Retail segments
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506,000
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New York, New York
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Administrative and sales offices, public relations and showrooms used by our Americas Wholesale segment
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13,400
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Montreal/Toronto/Vancouver, Canada
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Administrative offices, showrooms and warehouse facilities used by our Americas Wholesale and Americas Retail segments
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203,100
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São Paulo, Brazil
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Administrative office and showroom used by our Americas Wholesale and Americas Retail segments
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4,000
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Lugano/Stabio, Switzerland
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Administrative, sales and marketing offices, design facilities and showrooms used by our Europe segment
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120,700
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Venlo, Netherlands
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Distribution and warehousing facility used by all of our segments.
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658,200
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Paris, France
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Administrative office and showroom used by our Europe segment
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16,000
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Dusseldorf/Munich, Germany
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Administrative office and showrooms used by our Europe segment
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14,800
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Florence, Italy
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Administrative office used by our Europe segment
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114,800
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Warsaw, Poland
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Administrative office and showrooms used by our Europe segment
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12,400
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Lisbon, Portugal
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Showroom used by our Europe segment
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6,000
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Moscow, Russia
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Administrative office and showroom used by our Europe segment
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6,500
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Barcelona, Spain
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Administrative office and showroom used by our Europe segment
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8,600
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Istanbul, Turkey
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Administrative office used by our Europe segment
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4,200
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Shanghai, China
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Administrative offices used by our Asia segment
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17,800
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Kowloon, Hong Kong
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Administrative and sales office, showroom and licensing coordination facilities used primarily by our Asia segment
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13,100
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Seoul, South Korea
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Administrative and sales offices, design facilities and showrooms used by our Asia segment
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45,100
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Tokyo, Japan
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Administrative and sales offices and showroom used by our Asia segment
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5,100
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Our corporate, wholesale and retail headquarters and certain warehouse facilities are located in Los Angeles, California, consisting of four buildings totaling approximately
341,700
square feet. These facilities are leased by us from limited partnerships in which the sole partners are trusts controlled by and for the benefit of Maurice Marciano and Paul Marciano (the “Principal Stockholders”) and their families pursuant to a lease that expires in July
2020
. The total lease payments related to these facilities are approximately $0.3 million per month with aggregate minimum lease commitments through the term of the lease totaling approximately $7.8 million as of
February 3, 2018
.
In addition, the Company, through a wholly-owned Canadian subsidiary, leases warehouse and administrative facilities in Montreal, Quebec from a partnership affiliated with the Principal Stockholders.
During fiscal 2018, the Company exercised an option to extend the lease term for an additional
one
-year period ending in
December 2018
.
All other terms of the existing lease remain in full force and effect
. The monthly lease payment is $42,000 Canadian (US$33,800) with aggregate minimum lease commitments through the term of the lease totaling approximately
$0.5 million
Canadian (US
$0.4 million
) as of
February 3, 2018
.
The Company, through a French subsidiary, leases a showroom and office space located in Paris, France from an entity that is owned in part by an affiliate of the Principal Stockholders. The lease expires in May 2020.
Due to excess capacity, the lease was amended to reduce the square footage by approximately
5,100
square feet to
16,000
square feet during fiscal 2018
.
The amendment also provided for a corresponding reduction in aggregate rent, common area maintenance charges and property tax expense due to the lower square footage
.
All other terms of the existing lease remain in full force and effect
. The aggregate minimum lease commitments through the term of the lease totaled approximately €1.6 million (US$2.1 million) as of
February 3, 2018
.
See Note
13
to the Consolidated Financial Statements for further information regarding related party transactions.
Our U.S. distribution center is a fully automated facility based in Louisville, Kentucky. During fiscal 2016, the Company purchased this facility
for approximately
$28.8 million
. In February 2016, the Company entered into a
ten
-year
$21.5 million
real estate secured loan
to partially finance this purchase.
Distribution of our products in Canada is handled primarily from
two leased facilities based in Montreal, Quebec.
Distribution of our products in Europe has been handled primarily through a
third party distribution center in Piacenza, Italy
.
During fiscal 2018, the Company began relocating its European distribution center from its Italy location to a new facility located in Venlo, Netherlands. The Company expects to complete its transition to the new distribution center in the Netherlands during fiscal 2019.
Additionally, we utilize several third party operated distribution warehouses that service the Asia region.
We lease our showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under non-cancelable operating lease agreements expiring on various dates through
October 2037
. These facilities, located mainly in the Americas but with a growing presence in Europe and Asia, had aggregate real estate minimum lease commitments as of
February 3, 2018
totaling approximately $971.3 million, excluding related party commitments.
The terms of our store and concession leases, excluding renewal options and kick-out clauses, as of
February 3, 2018
, expire as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stores and Concessions
|
Years Lease Terms Expire
|
|
Americas
|
|
Europe
|
|
Asia
|
Fiscal 2019-2021
|
|
283
|
|
|
124
|
|
|
252
|
|
Fiscal 2022-2024
|
|
116
|
|
|
144
|
|
|
57
|
|
Fiscal 2025-2027
|
|
73
|
|
|
99
|
|
|
18
|
|
Fiscal 2028-2030
|
|
9
|
|
|
57
|
|
|
7
|
|
Thereafter
|
|
—
|
|
|
9
|
|
|
—
|
|
|
|
481
|
|
|
433
|
|
|
334
|
|
We believe our existing facilities are well maintained, in good operating condition and are adequate to support our present level of operations. See Note
14
to the Consolidated Financial Statements for further information regarding current lease obligations.
ITEM 3. Legal Proceedings.
On May 6, 2009, Gucci America, Inc. filed a complaint in the U.S. District Court for the Southern District of New York against Guess?, Inc. and certain third party licensees for the Company asserting, among other things, trademark and trade dress law violations and unfair competition. The complaint sought injunctive relief, compensatory damages, including treble damages, and certain other relief. Complaints similar to those in the above action have
also been filed by Gucci entities against the Company and certain of its subsidiaries in the Court of Milan, Italy, the Intermediate People’s Court of Nanjing, China and the Court of Paris, France. The three-week bench trial in the U.S. matter concluded on April 19, 2012, with the court issuing a preliminary ruling on May 21, 2012 and a final ruling on July 19, 2012. Although the plaintiff was seeking compensation in the U.S. matter in the form of damages of
$26 million
and an accounting of profits of
$99 million
, the final ruling provided for monetary damages of
$2.3 million
against the Company and
$2.3 million
against certain of its licensees. The court also granted narrow injunctions in favor of the plaintiff for certain of the claimed infringements. On August 20, 2012, the appeal period expired without any party having filed an appeal, rendering the judgment final. On May 2, 2013, the Court of Milan ruled in favor of the Company in the Milan, Italy matter. In the ruling, the Court rejected all of the plaintiff’s claims and ordered the cancellation of
three
of the plaintiff’s Italian and
four
of the plaintiff’s European Community trademark registrations. On June 10, 2013, the plaintiff appealed the Court’s ruling in the Milan matter. On September 15, 2014, the Court of Appeal of Milan affirmed the majority of the lower Court’s ruling in favor of the Company, but overturned the lower Court’s finding with respect to an unfair competition claim. That portion of the matter is now in a damages phase based on the ruling. On October 16, 2015, the plaintiff appealed the remainder of the Court of Appeal of Milan’s ruling in favor of the Company to the Italian Supreme Court of Cassation. In the China matter, the Intermediate People’s Court of Nanjing, China issued a ruling on November 8, 2013 granting an injunction in favor of the plaintiff for certain of the claimed infringements on handbags and small leather goods and awarding the plaintiff statutory damages in the amount of approximately
$80,000
. The Company strongly disagreed with the Court’s decision and appealed the ruling. On August 31, 2016, the Court of Appeal for the China matter issued a decision in favor of the Company, rejecting all of the plaintiff’s claims. In March 2017, the plaintiff petitioned the China Supreme Court for a retrial of the matter. On January 30, 2015, the Court of Paris ruled in favor of the Company in the France matter, rejecting all of the plaintiff’s claims and partially canceling
two
of the plaintiff’s community trademark registrations and
one
of the plaintiff’s international trademark registrations. On February 17, 2015, the plaintiff appealed the Court of Paris’ ruling.
Although the Company believes that it has a strong position with respect to each of the remaining matters, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcomes will have a material impact on the Company’s financial position or results of operations. The parties are currently engaged in settlement discussions with respect to the remaining matters.
The Company has received customs tax assessment notices from the Italian Customs Agency regarding its customs tax audit of
one
of the Company’s European subsidiaries for the period from
July 2010
through
December 2012
. Such assessments totaled
€9.8 million
(
$12.2 million
), including potential penalties and interest. The Company strongly disagrees with the positions that the Italian Customs Agency has taken and therefore filed appeals with the Milan First Degree Tax Court (“MFDTC”). In May 2015, the MFDTC issued a judgment in favor of the Company in relation to the first set of appeals (covering the period through
September 2010
) and canceled the related assessments totaling
€1.7 million
(
$2.1 million
). In November 2015, the Italian Customs Agency notified the Company of its intent to appeal this first MFDTC judgment. During fiscal 2017, the Appeals Court ruled in favor of the Company and rejected the appeal by the Italian Customs Agency on the first MFDTC judgment. During fiscal 2017, the MFDTC also issued judgments in favor of the Company in relation to the second through seventh set of appeals (covering the period from
October 2010
through
December 2012
) and canceled the related assessments totaling
€8.1 million
(
$10.1 million
). Subsequently, the Italian Customs Agency has appealed the majority of these favorable MFDTC judgments, as well as certain of the Appeals Court judgments. While these MFDTC judgments have been favorable to the Company, there can be no assurances that the Italian Customs Agency will not be successful in its remaining appeals.
It also continues to be possible that the Company will receive similar or even larger assessments for periods subsequent to
December 2012
or other claims or charges related to the matter in the future.
Although the Company believes that it has a strong position and will continue to vigorously defend this matter, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcome will have a material impact on the Company’s financial position or results of operations.
On June 6, 2017, the European Commission notified the Company that it has initiated proceedings to investigate whether certain of the Company’s practices and agreements concerning the distribution of apparel and accessories within the European Union breach European Union competition rules related to cross-border transactions, internet sales limitations and resale price restrictions. The initiation of the proceedings does not mean that the European Commission has made a definitive conclusion regarding whether the Company breached any rules. The Company has cooperated and plans to continue to cooperate with the European Commission, including through responses to
requests for information and through changes to certain business practices and agreements, as appropriate. If a violation is ultimately found, a broad range of remedies is potentially available to the European Commission, including imposing a fine and/or injunctive relief prohibiting or restricting certain business practices. As of November 6, 2017, the Company and the European Commission agreed to begin a settlement discussion process to determine if the parties can mutually agree on an outcome of the proceedings. Those discussions are still ongoing. At this point, the Company is unable to predict the timing or outcome of these proceedings, including the magnitude of any potential fine. However, the Company does not currently believe that any changes to its business practices or agreements made in connection with this proceeding will have a material impact on its ongoing business operations within the European Union.
The Company is also involved in various other claims and other matters incidental to the Company’s business, the resolutions of which are not expected to have a material adverse effect on the Company’s financial position or results of operations.
ITEM 4. Mine Safety Disclosures.
Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
1
) Description of the Business and Summary of Significant Accounting Policies and Practices
Description of the Business
Guess?, Inc. (the “Company” or “GUESS?”) designs, markets, distributes and licenses a leading lifestyle collection of contemporary apparel and accessories for men, women and children that reflect the American lifestyle and European fashion sensibilities. The Company’s designs are sold in GUESS? owned stores, to a network of wholesale accounts that includes better department stores, selected specialty retailers and upscale boutiques and through the Internet. GUESS? branded products, some of which are produced under license, are also sold internationally through a series of retail store licensees and wholesale distributors.
Correction of Immaterial Error
During the year ended
February 3, 2018
, the Company identified an immaterial error related to the classification of net royalties received on the Company’s purchases of licensed product.
The Company’s typical license agreement requires the licensee to pay the Company a royalty based on the licensee’s net sales of licensed products, which in certain cases also includes licensed inventory that was purchased by the Company
. Historically, the Company has included royalties received on the Company’s purchases of licensed product in net royalties generated from its Licensing segment. However, in connection with the Company’s review of the new revenue recognition standard, it was determined that such royalties received should be recorded as a reduction of the cost of the licensed product under existing revenue recognition guidance. As a result, during the fourth quarter of fiscal 2018,
the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales
.
Accordingly, prior period amounts related to net royalties, net revenue and cost of product sales have been adjusted to conform to the current period presentation
.
This resulted in a decrease to net revenue and cost of product sales of
$18.9 million
and
$19.8 million
for fiscal
2017
and fiscal
2016
, respectively. This reclassification had no impact on previously reported earnings (loss) from operations, net earnings (loss) or net earnings (loss) per share.
Reclassifications
The Company has made certain reclassifications to prior period amounts to conform to the current period presentation within the accompanying notes to the consolidated financial statements.
Fiscal Year
The Company operates on a
52
/
53
-week fiscal year calendar, which ends on the Saturday nearest to January 31 of each year.
All references herein to “fiscal
2018
,” “fiscal
2017
” and “fiscal
2016
” represent the results of the
53
-week fiscal year ended
February 3, 2018
and the
52
-week fiscal years ended
January 28, 2017
and
January 30, 2016
. The additional week in fiscal 2018 occurred during the fourth quarter ended February 3, 2018. References to “fiscal
2019
” represent the
52
-week fiscal year ending February 2, 2019.
Principles of Consolidation
The consolidated financial statements include the accounts of Guess?, Inc., its wholly-owned direct and indirect subsidiaries and its non-wholly-owned subsidiaries and joint ventures in which the Company has a controlling financial interest and is determined to be the primary beneficiary. Accordingly, all references herein to “Guess?, Inc.” include the consolidated results of the Company, its wholly-owned subsidiaries and its joint ventures. All intercompany accounts and transactions are eliminated during the consolidation process.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosed in the accompanying notes. Significant areas requiring the use of management estimates relate to the
allowances for doubtful accounts, sales return and markdown allowances, gift card and loyalty accruals, valuation of inventories, share-based compensation, recoverability of deferred taxes, unrecognized tax benefits, the useful life of assets for depreciation and amortization, evaluation of asset impairment, 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.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Business Segment Reporting
Where applicable, the Company reports information about business segments and related disclosures about products and services, geographic areas and major customers.
The Company’s businesses are grouped into
five
reportable segments for management and internal financial reporting purposes:
Americas Retail
,
Americas Wholesale
,
Europe
,
Asia
and
Licensing
. The Company’s Americas Retail, Americas Wholesale, Europe and Licensing reportable segments are the same as their respective operating segments. Certain components of the Company’s Asia reportable segment are separate operating segments based on region which have been aggregated into the Asia reportable segment for disclosure purposes.
During fiscal 2018, net revenue and related costs and expenses for certain globally serviced customers were reclassified into the segment primarily responsible for the relationship. During fiscal 2018, segment results were also adjusted to exclude corporate performance-based compensation costs, net gains (losses) on lease terminations and asset impairment charges due to the fact that these items are no longer included in the segment results provided to the Company’s chief operating decision maker in order to allocate resources and assess performance. Accordingly, segment results have been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation
.
Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, net gains (losses) from lease terminations, asset impairment charges and restructuring charges, if any.
The Company believes this segment reporting reflects how its business segments are managed and how each segment’s performance is evaluated by the Company’s chief operating decision maker to assess performance and make resource allocation decisions. The
Americas Retail
segment includes the Company’s retail and e-commerce operations in North and Central America and its retail operations in South America. The
Americas Wholesale
segment includes the Company’s wholesale operations in the Americas. The
Europe
segment includes the Company’s retail, e-commerce and wholesale operations in Europe and the Middle East. The
Asia
segment includes the Company’s retail, e-commerce and wholesale operations in Asia and the Pacific. The
Licensing
segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, net gains (losses) on lease terminations, asset impairment charges and restructuring charges. Corporate overhead costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, corporate performance-based compensation, facilities, global advertising and marketing, human resources, information technology and legal.
Information regarding these segments is summarized in Note 17
.
Revenue Recognition
General
The Company recognizes retail operations revenue at the point of sale and wholesale operations revenue from the sale of merchandise when products are shipped and the customer takes title and assumes risk of loss, collection of the relevant receivable is reasonably assured, pervasive evidence of an arrangement exists, and the sales price is fixed or determinable. Revenue from our e-commerce operations, including shipping fees, is recognized based on the estimated customer receipt date.
The Company accrues for estimated sales returns
and other allowances
in the period in which the related revenue is recognized. To recognize the financial impact of sales returns, the Company estimates the amount of goods that will be returned based on historical experience and reduces sales and cost of sales accordingly
. Sales taxes and value added taxes collected from customers and remitted directly to governmental authorities are excluded from net revenues.
Net Royalty Revenue
Royalty revenue is based upon a percentage, as defined in the underlying agreement, of the licensee’s actual net sales or minimum net sales, whichever is greater. The Company may also receive special payments in consideration of the grant of license rights. These payments are recognized ratably as revenue over the term of the license agreement. The unrecognized portion of upfront payments is included in deferred royalties in accrued expenses and other long-term liabilities depending on the short or long-term nature of the payments to be recognized. As of
February 3, 2018
, the Company had
$6.8 million
and $
12.8 million
of deferred royalties included in accrued expenses and other long-term liabilities, respectively. This compares to
$6.1 million
and $
16.4 million
of deferred royalties included in accrued expenses and other long-term liabilities, respectively, at
January 28, 2017
.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gift Cards
Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by the Company for which a liability was recorded in prior periods. Gifts cards are mainly used in the U.S. and Canada. The Company issues its gift cards in the U.S. and Canada through
one
of its subsidiaries and is not required by law to escheat the value of unredeemed gift cards to the state in which the subsidiary is domiciled. Estimated breakage amounts are accounted for under the redemption recognition method and are classified as additional net revenues as the gift cards are redeemed.
The Company’s gift card breakage rate is approximately
6.1%
and
5.1%
for the U.S. retail business and Canadian retail business, respectively, based upon historical redemption patterns, which represents the cumulative estimated amount of gift card breakage from the inception of the electronic gift card program in late 2002. Based upon historical redemption trends, the Company recognizes estimated gift card breakage as a component of net revenue in proportion to actual gift card redemptions, over the period that remaining gift card values are redeemed. In fiscal
2018
, fiscal
2017
and fiscal
2016
, the Company recognized
$0.7 million
,
$0.8 million
and
$0.5 million
of gift card breakage to revenue, respectively. Any future revisions to the estimated breakage rate may result in changes in the amount of breakage income recognized in future periods.
Loyalty Programs
The Company has customer loyalty programs in North America, Europe and Asia which cover all of its brands. Under certain of the programs, primarily in the U.S. and Canada, customers accumulate points based on purchase activity. Once a loyalty program member achieves a certain point level, the member earns awards that may only be redeemed for merchandise. Unredeemed points generally expire after
six
months without additional purchase activity and unredeemed awards generally expire after
two
months. The Company uses historical redemption rates to estimate the value of future award redemptions which are accrued in current liabilities and recorded as a reduction of net revenue in the period which the related revenue is recognized.
The aggregate dollar value of the loyalty program accruals included in accrued expenses was
$3.8 million
and
$4.0 million
as of
February 3, 2018
and
January 28, 2017
, respectively. Future revisions to the estimated liability may result in changes to net revenue
.
Classification of Certain Costs and Expenses
The Company includes inbound freight charges, purchasing costs and related overhead, retail store occupancy costs, including rent and depreciation, and a portion of the Company’s distribution costs related to its direct-to-consumer business in cost of product sales. Distribution costs related primarily to the wholesale business are included in selling, general and administrative (“SG&A”) expenses and amounted to
$34.2 million
,
$22.6 million
and
$23.2 million
for fiscal
2018
, fiscal
2017
and fiscal
2016
, respectively. The Company also includes store selling, selling and merchandising, advertising, design and other corporate overhead costs as a component of SG&A expenses.
The Company classifies amounts billed to customers for shipping fees as revenues and classifies costs related to shipping as cost of product sales in the accompanying consolidated statements of income (loss).
Advertising and Marketing Costs
The Company expenses the cost of advertising as incurred. Advertising and marketing expenses charged to operations for fiscal
2018
, fiscal
2017
and fiscal
2016
were
$36.3 million
,
$37.1 million
and
$31.6 million
, respectively.
Share-Based Compensation
The Company recognizes compensation expense for all share-based awards granted based on the grant date fair value. The fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model and involves several assumptions, including the risk-free interest rate, expected volatility, dividend yield and expected life
.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant.
The expected stock price volatility is determined based on an average of both historical volatility and implied volatility. Implied volatility is derived from exchange traded options on the Company’s common stock.
The expected dividend yield is based on the Company’s history and expectations of dividend payouts.
The expected life is determined based on historical trends.
Compensation expense for nonvested stock options and stock awards/units that are not subject to performance-based vesting conditions is recognized on a straight-line basis over
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the vesting period
.
During fiscal 2018, the Company adopted authoritative guidance which eliminates the requirement to estimate forfeitures, but rather provides for an election that would allow entities to account for forfeitures as they occur.
In addition, the
Company has granted certain nonvested units that require certain minimum performance targets to be achieved in order for these awards to vest
.
Vesting is also subject to continued service requirements through the vesting date
.
Compensation expense for performance-based awards that vest in increments is recognized based on an accelerated attribution method
.
If the minimum performance targets are not forecasted to be achieved, no expense is recognized during the period
.
The Company has
also
granted certain nonvested stock units which are subject to market-based performance targets in order for these units to vest. Vesting is also subject to continued service requirements through the vesting date. The grant date fair value for such nonvested stock units was estimated using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the performance period. Compensation expense for such nonvested stock units is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied.
During fiscal 2016, the Company granted certain restricted stock units which vested immediately but were considered contingently returnable as a result of certain service conditions.
Compensation expense for these restricted stock units was recognized on a straight-line basis over the implied service period.
Foreign Currency
Foreign Currency Translation Adjustment
The local selling currency is typically the functional currency for all of the Company’s significant international operations. In accordance with authoritative guidance, assets and liabilities of the Company’s foreign operations are translated from foreign currencies into U.S. dollars at period-end rates, while income and expenses are translated at the weighted average exchange rates for the period. The related translation adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive income (loss) within stockholders’ equity. In addition, the Company records foreign currency translation adjustments related to its noncontrolling interests within stockholders’ equity.
Periodically, the Company may
also
use foreign exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries
(see below). Changes in the fair values of these foreign exchange currency contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity. The total foreign currency translation adjustment
in
creased stockholders’ equity by
$93.4 million
, from an accumulated foreign currency translation
loss
of
$164.7 million
as of
January 28, 2017
to an accumulated foreign currency translation
loss
of
$71.3 million
as of
February 3, 2018
.
Foreign Currency Transaction Gains and Losses
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, including gains and losses on foreign exchange currency contracts (see below), are included in the consolidated statements of income (loss). Net foreign currency transaction gains (losses) included in the determination of net earnings (loss) were
$(5.9) million
,
$3.6 million
and
$10.0 million
for fiscal
2018
, fiscal
2017
and fiscal
2016
, respectively.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivatives
Foreign Exchange Currency Contracts
The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations.
Various transactions that occur primarily in Europe, Canada, South Korea, China 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
. The Company has entered into certain forward contracts to hedge the risk of a portion of these anticipated foreign currency transactions against foreign currency rate fluctuations.
The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges.
The Company does not hedge all transactions denominated in foreign currency. The Company may also hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries.
Changes in the fair value of the U.S. dollar/euro and U.S. dollar/Canadian dollar forward contracts for anticipated U.S. dollar merchandise purchases designated as cash flow hedges
are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold.
Changes in the fair value of U.S. dollar/euro forward contracts for U.S. dollar intercompany royalties designated as cash flow hedges
are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in other income and expense in the period in which the royalty expense is incurred.
Changes in the fair value of any U.S. dollar/euro forward contracts designated as net investment hedges
are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in earnings (loss) until the sale or liquidation of the hedged net investment
.
The Company also has
forward
contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of
forward
contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense.
Interest Rate Swap Agreements
The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts.
Changes in the fair value of interest rate swap agreements designated as cash flow hedges are
recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
Periodically, the Company may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when management believes
it is more likely than not that the results of operations will not generate sufficient taxable earnings to realize certain net deferred tax assets.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company accounts for uncertainty in income taxes in accordance with authoritative guidance, which
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The Company also follows authoritative guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
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. The potentially dilutive impact of common equivalent shares outstanding are not included in the computation of diluted net loss per share as the impact of the shares would be antidilutive due to the net loss incurred for the period. Nonvested restricted stock awards (referred to as participating securities) are excluded from the dilutive impact of common equivalent shares outstanding in accordance with authoritative guidance under the two-class method since the nonvested restricted stockholders are entitled to participate in dividends declared on common stock as if the shares were fully vested and hence are deemed to be participating securities. Under the two-class method, distributed and undistributed earnings attributable to nonvested restricted stockholders are excluded from net earnings (loss) attributable to common stockholders for purposes of calculating basic and diluted earnings (loss) per common share. However, net losses are not allocated to nonvested restricted stockholders because they are not contractually obligated to share in the losses of the Company.
In addition, the Company has granted certain nonvested stock units that are subject to certain performance-based or market-based vesting conditions as well as continued service requirements through the respective vesting periods. These nonvested stock units are included in the computation of diluted net earnings per common share attributable to common stockholders only to the extent that the underlying performance-based or market-based vesting conditions are satisfied as of the end of the reporting period, or would be considered satisfied if the end of the reporting period were the end of the related contingency period, and the results would be dilutive under the treasury stock method.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net earnings (loss), foreign currency translation adjustments, the effective portion of the change in the fair value of cash flow hedges, unrealized and realized gains or losses and other-than-temporary-impairment on available-for-sale securities and defined benefit plan impact from actuarial valuation gains or losses and related amortization, plan amendment, prior service credit or cost amortization and curtailment. Comprehensive income (loss) is presented in the consolidated statements of comprehensive income.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of
three months
or less.
Investment Securities
The Company accounts for its investment securities in accordance with authoritative guidance which requires investments to be classified into one of three categories based on management’s intent: held-to-maturity securities, available-for-sale securities and trading securities. Held-to-maturity securities are recorded at their amortized cost. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity. Trading securities are recorded at market value with unrealized gains and losses reported in net earnings. The appropriate classification of investment securities is determined at the time of purchase and reevaluated at each balance sheet date. The Company has historically accounted for its investment securities, if any, as available-for-sale.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company periodically evaluates
investment
securities for other-than-temporary-impairment using both qualitative and quantitative criteria such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in market value. Other-than-temporary-impairment is recognized in net earnings (loss) as part of other income and expense in the period which the unrealized losses are deemed other than temporary.
During fiscal 2017, the Company determined that its available-for-sale securities were fully impaired and recognized minimal other-than-temporary-impairment in other expense.
Concentration of Credit and Liquidity Risk
Cash used primarily for working capital purposes is maintained with various major financial institutions. The Company performs evaluations of the relative credit standing of these financial institutions in order to limit the amount of asset and liquidity exposure with any institution.
Excess cash and cash equivalents, which represent the majority of
the Company’s
outstanding cash and cash equivalents balance, are held primarily in overnight deposit and short-term time deposit accounts
.
The Company is also exposed to concentrations of credit risk through its accounts receivable balances. The Company extends credit to corporate customers based upon an evaluation of the customer’s financial condition and credit history and generally requires no collateral but does obtain credit insurance when considered appropriate. As of
February 3, 2018
, approximately
59%
of the Company’s total net trade accounts receivable and
72%
of its European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. The Company’s credit insurance coverage contains certain terms and conditions specifying deductibles and annual claim limits.
The Company maintains allowances for doubtful accounts for estimated losses that result from the inability of its wholesale customers to make their required payments.
The Company bases its allowances on analysis of the aging of accounts receivable at the date of the financial statements, assessments of historical collection trends, an evaluation of the impact of current economic conditions and whether the Company has obtained credit insurance or other guarantees.
The Company’s corporate customers are principally located throughout Europe, Asia and the Americas.
Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based on these evaluations. The Company’s credit losses for the periods presented were immaterial and did not significantly exceed management’s estimates. The Company’s two largest wholesale customers accounted for a total of approximately
2.2%
,
2.7%
and
3.4%
of the Company’s consolidated net revenue in fiscal
2018
, fiscal
2017
and fiscal
2016
, respectively.
Inventories
Inventories are valued at the lower of cost (primarily weighted average method) or net realizable value. The Company continually evaluates its inventories by assessing slow moving product as well as prior seasons’ inventory. Net realizable value of aged inventory is estimated based on historical sales trends for each product line category, the impact of market trends, an evaluation of economic conditions, available liquidation channels and the value of current orders relating to the future sales of this type of inventory.
Depreciation and Amortization
Depreciation and amortization of property and equipment and purchased intangibles are provided using the straight-line method over the following useful lives:
|
|
|
Building and building improvements
|
10 to 39 years
|
Land improvements
|
5 years
|
Furniture, fixtures and equipment
|
2 to 10 years
|
Purchased intangibles
|
4 to 20 years
|
Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the term of the lease, including reasonably assured renewal periods. Construction in progress is not depreciated until the related asset is completed and placed in service.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-Lived Assets
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, 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 and certain long-term security deposits and lease acquisition costs. The Company reviews regular retail locations in penetrated markets for impairment risk once the locations have been opened for at least
one year
in their current condition, or sooner as changes in circumstances require. The Company believes that waiting at least one year allows a location to reach a maturity level where a more comprehensive analysis of financial performance can be performed. The Company evaluates impairment risk for regular retail locations in new markets, where the Company is in the early stages of establishing its presence, once
brand awareness has been established. The Company also evaluates impairment risk for retail locations that are expected to be closed in the foreseeable future. The Company has flagship locations which are used as a regional marketing tool to build brand awareness and promote the Company’s current product. Impairment for these locations is tested at a reporting unit level similar to goodwill
(see below)
since they do not have separately identifiable cash flows.
An asset is considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment of the asset’s ability to continue to generate earnings from operations and positive cash flow in future periods or if significant changes in the Company’s strategic business objectives and utilization of the assets occurred.
If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value, which is determined based on discounted future cash flows. 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: 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.
The estimated cash flows used for this nonrecurring fair value measurement are considered a Level 3 input as defined in Note
20
.
If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the Company’s results of operations
.
See Note
5
for further details on asset impairment charges.
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, its European wholesale and European retail components of its Europe segment and its China retail component of its Asia segment as reporting units for goodwill impairment testing.
In accordance with authoritative guidance, the Company may first assess qualitative factors relevant in determining whether it is more likely than not that the fair value of its reporting units are less than their carrying amounts. Based on this analysis, the Company may determine whether it is necessary to perform a quantitative impairment test. If it is more likely than not that the fair value of a reporting unit is less than
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
its carrying amount, the amount of any impairment loss to be recognized for that reporting unit is determined using two steps. First, the Company determines the fair value of the reporting unit using a discounted cash flow analysis, which requires unobservable inputs (Level 3) within the fair value hierarchy as defined in Note
20
. These inputs include selection of an appropriate discount rate and the amount and timing of expected future cash flows. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill and other intangibles over the implied fair value. The implied fair value is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with authoritative guidance.
Other Assets
Other assets mainly relate to the Company’s investments in insurance policies held in rabbi trusts to fund expected obligations arising under its non-qualified supplemental executive retirement and deferred compensation plans. Refer to Notes 12 and 15 for further information regarding these investments.
In addition, other assets also relate to security, key money and other deposits to secure prime retail store locations and receivables related to refundable value-added tax payments mainly from European taxing authorities.
During fiscal 2017, the Company sold its minority interest equity holding in a privately-held boutique apparel company for net proceeds of approximately $
34.8 million
, which resulted in a gain of approximately $
22.3 million
which was recorded in other income.
Defined Benefit Plans
In accordance with authoritative guidance for defined benefit pension and other postretirement plans, an asset for a plan’s overfunded status or a liability for a plan’s underfunded status is recognized in the consolidated balance sheets; plan assets and obligations that determine the plan’s funded status are measured as of the end of the Company’s fiscal year; and changes in the funded status of defined benefit postretirement plans are recognized in the year in which they occur. Such changes are reported in other comprehensive income (loss) as a separate component of stockholders’ equity.
The Company’s pension obligations and related costs are calculated using actuarial concepts, within the authoritative guidance framework
, and are considered Level 3 inputs as defined in Note 20.
The Company uses the corridor approach to amortize unrecognized actuarial gains or losses over the average remaining service life of active participants. The life expectancy, estimated retirement age, discount rate, estimated future compensation and expected return on plan assets are important elements of expense and/or liability measurement. These critical assumptions are evaluated annually which enables expected future payments for benefits to be stated at present value on the measurement date. If actual results are not consistent with actuarial assumptions, the amounts recognized for the defined benefit plans could change significantly.
Deferred Rent and Lease Incentives
When a lease includes lease incentives (such as a rent holiday) or requires fixed escalations of the minimum lease payments or advances, rental expense is recognized on a straight-line basis over the term of the lease. The difference between the average rental amount charged to expense and the lease payments or advances under the lease is included either in deferred rent and lease incentives or other assets in the accompanying consolidated balance sheets depending on whether the difference is in a liability or asset position at the end of the period. For construction allowances, the Company records a deferred lease credit on the consolidated balance sheets and amortizes the deferred lease credit as a reduction of rent expense in the consolidated statements of income (loss) over the term of the leases.
Net Gains (Losses) on Lease Terminations
During fiscal 2018, the Company recorded net losses on lease terminations
related primarily to the modification of certain lease agreements held with a common landlord in North America
. In connection with this modification, the Company made up-front payments of approximately
$22 million
, of which
$12 million
was recognized as net losses on lease terminations and
$10 million
was recorded as advance rent payments. During fiscal 2018, the Company
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
also recorded net gains on lease terminations of approximately
$1 million
related primarily to the early termination of certain lease agreements in Europe.
During fiscal
2017
and fiscal
2016
,
the Company recorded net gains on lease terminations of
$0.7 million
and
$2.3 million
, respectively,
related primarily to the early termination of certain lease agreements in Europe
.
Litigation Reserves
Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. As additional information becomes available, the Company assesses the potential liability related to new claims and existing claims and revises estimates as appropriate. As new claims arise or existing claims evolve, such revisions in estimates of the potential liability could materially impact the results of operations and financial position.
(2) New Accounting Guidance
Changes in Accounting Policies
In July 2015, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance to simplify the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost or net realizable value test. The Company adopted this guidance effective January 29, 2017 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In March 2016, the FASB issued authoritative guidance to simplify the accounting for certain aspects of share-based compensation. This guidance addresses the accounting for income tax effects at award settlement, the use of an expected forfeiture rate to estimate award cancellations prior to the vesting date and the presentation of excess tax benefits and shares surrendered for tax withholdings on the statement of cash flows. The Company adopted this guidance effective January 29, 2017. This guidance requires all income tax effects of awards (resulting from an increase or decrease in the fair value of an award from grant date to the vesting date) to be recognized in the income statement when the awards vest or are settled. This is a change from previous guidance that required such activity to be recorded in paid-in capital within stockholders’ equity. The Company adopted this provision prospectively and accordingly recorded tax shortfalls of approximately
$1.3 million
in its consolidated statement of income (loss) during fiscal 2018. This resulted in a negative impact on net loss attributable to Guess?, Inc. of approximately
$1.3 million
, or an unfavorable
$0.02
per share impact during fiscal 2018. Under this guidance, excess tax benefits are also excluded from the assumed proceeds available to repurchase shares in the computation of diluted earnings (loss) per share. This was adopted prospectively and did not have an impact on the Company’s diluted loss per share for fiscal 2018. This guidance also eliminates the requirement to estimate forfeitures, but rather provides for an election that would allow entities to account for forfeitures as they occur. The Company adopted this election beginning in the first quarter of fiscal 2018 using the modified retrospective method and recorded a cumulative adjustment to reduce retained earnings by approximately
$0.3 million
. This guidance also changes the presentation of excess tax benefits from a financing activity to an operating activity in the statement of cash flows. This presentation was adopted on a retrospective basis and, as a result, net cash used in operating activities improved by
$0.3 million
and
$0.2 million
with a corresponding offset to net cash used in financing activities during fiscal 2017 and fiscal 2016, respectively.
In August 2016, the FASB issued authoritative guidance related to the classification of certain cash receipts and cash payments in the statement of cash flows. The Company adopted this guidance effective January 29, 2017 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In October 2016, the FASB issued authoritative guidance that requires an entity to include indirect interests held through related parties that are under common control on a proportionate basis when evaluating if a reporting entity is the primary beneficiary of a variable interest entity. The Company adopted this guidance effective January 29, 2017. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements or related disclosures.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In November 2016, the FASB issued authoritative guidance related to the presentation of restricted cash in the statement of cash flows. This guidance requires that the statement of cash flows reconcile the change during the period in total cash, cash equivalents and restricted cash. The Company’s restricted cash is generally held as collateral for certain transactions. The Company adopted this guidance effective January 29, 2017 on a retrospective basis. As a result, the Company updated its consolidated statements of cash flows for fiscal 2018, fiscal 2017 and fiscal 2016 to include restricted cash with cash and cash equivalents when reconciling the beginning and end of period balances and to eliminate changes in restricted cash that have historically been included within operating and investing activities.
In January 2017, the FASB issued authoritative guidance which clarifies the definition of a business to assist entities when evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The Company early adopted this guidance effective January 29, 2017 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In February 2018, the FASB issued authoritative guidance to address
certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the
2017 Tax Cuts and Jobs Act (the “Tax Reform”)
enacted in December 2017
. This guidance provides the Company with an option to reclassify stranded tax effected within accumulated other comprehensive income (loss) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate due to the Tax Reform is recorded. The Company early adopted this guidance during the fourth quarter of fiscal 2018 and recorded a cumulative adjustment to increase retained earnings by approximately
$1.2 million
.
Recently Issued Accounting Guidance
In May 2014, the
FASB
issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard is intended to clarify the principles of recognizing revenue and create common revenue recognition guidance between GAAP and International Financial Reporting Standards. The standard also requires expanded disclosures surrounding revenue recognition. During fiscal 2017, the FASB issued additional clarification guidance on the new revenue recognition standard which also included certain scope improvements and practical expedients. The standard (including clarification guidance issued) is effective for fiscal periods beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and allows for either full retrospective or modified retrospective adoption, with early adoption permitted. The Company has adopted this guidance using the modified retrospective method beginning in the first quarter of fiscal 2019. The Company’s assessment efforts have included reviewing current revenue processes, arrangements and accounting policies to identify potential differences that could arise from the application of this standard on its consolidated financial statements and related disclosures. While the Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements, the Company expects there to be differences related primarily to the classification and timing of when revenue and certain expenses are recognized from its licensing business. These differences relate primarily to changes in the presentation of advertising contributions received from the Company’s licensees and related advertising expenditures incurred by the Company. The Company currently records advertising contributions received from its licensees and the related advertising expenditures incurred by the Company on a net basis in its consolidated balance sheet. To the extent that the advertising contributions exceed the Company’s advertising expenditures for its licensees, the excess contribution is treated as a deferred liability and is included in accrued expenses in the Company’s consolidated balance sheet. Under the new standard, advertising contributions and related advertising expenditures related to the Company’s licensing business will be recorded on a gross basis which will increase net revenue as well as SG&A expenses. The Company also expects revenue related to its e-commerce operations to be recognized when merchandise is transferred to a common carrier rather than upon receipt by the customer, as well as adjustments to the accounting for the Company’s loyalty programs due to a slight change in the valuation of the amount that is deferred related to points earned.
Additionally, allowances for wholesale sales returns and wholesale markdowns will be presented as accrued expenses rather than as reductions to accounts receivable and the estimated cost of inventory associated with the allowance for sales returns will be presented within other current assets in the Company’s consolidated balance sheet.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 2016, the FASB issued authoritative guidance which requires equity investments not accounted for under the equity method of accounting or consolidation accounting to be measured at fair value, with subsequent changes in fair value recognized in net income. In February 2018, the FASB issued additional clarification guidance which made targeted improvements to address certain aspects of recognition, measurement, presentation and disclosure requirements for financial instruments. The original guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The clarification guidance is effective for fiscal years beginning after December 15, 2017 and interim periods beginning after June 15, 2015, which will be the Company’s third quarter of fiscal 2019. The clarification guidance may be early adopted, provided that the original guidance issued has been adopted. The adoption of this guidance (including the clarification guidance) is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures unless the Company acquires new equity investments.
In February 2016, the FASB issued a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize assets and liabilities related to long-term leases that were classified as operating leases under previous guidance in its balance sheet. An asset would be recognized related to the right to use the underlying asset and a liability would be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases. The standard is effective for fiscal periods beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020, and requires modified retrospective adoption, with early adoption permitted. The Company expects that this adoption will result in material increases in assets and liabilities in its consolidated balance sheet as well as enhanced disclosures. The Company is in the process of implementing controls and system changes to enable the preparation of the required financial information for this standard.
In June 2016, the FASB issued authoritative guidance related to the measurement of credit losses on financial instruments. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021. Early adoption is permitted for fiscal periods beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued authoritative guidance which amends the accounting for income taxes on intra-entity transfers of assets other than inventory. This guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The income tax consequences on intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is permitted at the beginning of a fiscal year. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.
In January 2017, the FASB issued authoritative guidance to simplify the testing for goodwill impairment by removing step two from the goodwill testing. Under current guidance, if the fair value of a reporting unit is lower than its carrying amount (step one), an entity would calculate an impairment charge by comparing the implied fair value of goodwill with its carrying amount (step two). The implied fair value of goodwill was calculated by deducting the fair value of the assets and liabilities of the respective reporting unit from the reporting unit’s fair value as determined under step one. This guidance instead provides that an impairment charge should be recognized based on the difference between a reporting unit’s fair value and its carrying value. This guidance also does not require a qualitative test to be performed on reporting units with zero or negative carrying amounts. However, entities need to disclose any reporting units with zero or negative carrying amounts that have goodwill and the amount of goodwill allocated to each. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March 2017, the FASB issued authoritative guidance related to the presentation of net periodic pension cost in the income statement. This guidance requires that the service cost component of net periodic pension cost is presented in the same line as other compensation costs arising from services rendered by the employees during the period. The other non-service components of net periodic pension cost are required to be presented in the income statement separately from the service cost component and outside of earnings from operations. This guidance also allows for the service cost component to be eligible for capitalization when applicable. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and requires retrospective adoption for the presentation of the service cost component and other non-service components of net periodic pension cost in the income statement and prospective adoption for capitalization of the service cost component. Other than the change in presentation of other non-service components of net periodic pension cost within the Company’s consolidated statements of income, the adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements and related disclosures.
In May 2017, the FASB issued authoritative guidance that provides clarification on accounting for modifications in share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, with early adoption permitted. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements or related disclosures unless there are modifications to the Company’s share-based payment awards.
In August 2017, the FASB issued authoritative guidance to better align the results of hedge accounting with an entity’s risk management activities. This guidance updates the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. This guidance is effective for fiscal years beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with early adoption permitted. The updated presentation and disclosure guidance is required only on a prospective basis. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.
(3) Accounts Receivable
Accounts receivable is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
Trade
|
$
|
290,478
|
|
|
$
|
234,690
|
|
Royalty
|
5,504
|
|
|
19,881
|
|
Other
|
13,233
|
|
|
5,888
|
|
|
309,215
|
|
|
260,459
|
|
Less allowances
|
49,219
|
|
|
34,922
|
|
|
$
|
259,996
|
|
|
$
|
225,537
|
|
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 Asia and the Americas, royalty receivables relating to its licensing operations, credit card and retail concession receivables related to its retail businesses and certain other receivables
. Other receivables generally relate to amounts due to the Company that result from activities that are not related to the direct sale of the Company’s products or collection of royalties. The accounts receivable allowance includes allowances for doubtful accounts, wholesale sales returns and wholesale markdowns. Retail sales returns allowances are included in accrued expenses.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
Raw materials
|
$
|
604
|
|
|
$
|
799
|
|
Work in progress
|
16
|
|
|
78
|
|
Finished goods
|
427,684
|
|
|
366,504
|
|
|
$
|
428,304
|
|
|
$
|
367,381
|
|
The above balances include an allowance to write down inventories to the lower of cost or net realizable value of
$29.9 million
and
$19.4 million
as of
February 3, 2018
and
January 28, 2017
, respectively.
(
5
) Property and Equipment
Property and equipment is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
Land and land improvements
|
$
|
2,750
|
|
|
$
|
2,750
|
|
Building and building improvements
|
51,285
|
|
|
47,673
|
|
Leasehold improvements
|
380,234
|
|
|
367,294
|
|
Furniture, fixtures and equipment
|
389,393
|
|
|
353,843
|
|
Construction in progress
|
16,555
|
|
|
13,163
|
|
Assets under capital leases
|
19,560
|
|
|
—
|
|
|
859,777
|
|
|
784,723
|
|
Less accumulated depreciation and amortization
|
565,523
|
|
|
541,718
|
|
|
$
|
294,254
|
|
|
$
|
243,005
|
|
During fiscal 2016, the Company purchased,
for approximately
$28.8 million
, the facility that houses its U.S. distribution center.
During fiscal 2018, the Company began the relocation of its European distribution center to the Netherlands
and
entered into a capital lease
for equipment used in the new facility.
During fiscal 2018, the Company also entered into a capital lease
related primarily to computer hardware and software.
The accumulated depreciation and amortization related to assets under capital leases was approximately
$0.9 million
as of
February 3, 2018
and was included in depreciation expense when recognized. See Note 8 for more information regarding the related capital lease obligations.
Construction in progress represents the costs associated with the construction in progress of leasehold improvements to be used in the Company’s operations, primarily for new and remodeled stores in retail operations.
Impairment
The Company recorded asset impairment charges of
$8.5 million
,
$34.4 million
and
$2.3 million
for fiscal
2018
, fiscal
2017
and fiscal
2016
, respectively. The asset impairment charges
related primarily to the impairment of certain retail locations in North America
resulting from under-performance and expected store closures
during each of the respective periods.
Impairments to long-lived assets are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
Aggregate carrying value of long-lived assets impaired
|
$
|
8,728
|
|
|
$
|
36,103
|
|
Less asset impairment charges
|
8,479
|
|
|
34,385
|
|
Aggregate remaining fair value of long-lived assets impaired
|
$
|
249
|
|
|
$
|
1,718
|
|
The Company’s impairment evaluations included testing of
233
retail locations and
255
retail locations during fiscal
2018
and fiscal
2017
, respectively, which were deemed to have impairment indicators. The Company concluded
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that
99
retail locations and
148
retail locations, respectively, were determined to be impaired, as the carrying amounts of the assets exceeded their estimated fair values (determined based on discounted cash flows) at each of the respective dates. Refer to Note 1 for a description of other assumptions that management considers in estimating the future discounted cash flows. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the Company’s results of operations.
(6) Goodwill and Intangible Assets
Goodwill activity is summarized by business segment as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Retail
|
|
Americas Wholesale
|
|
Europe
|
|
Asia
|
|
Total
|
Goodwill balance at January 30, 2016
|
$
|
1,693
|
|
|
$
|
9,960
|
|
|
$
|
21,759
|
|
|
$
|
—
|
|
|
$
|
33,412
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
Acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
933
|
|
|
933
|
|
Translation adjustments
|
36
|
|
|
6
|
|
|
(287
|
)
|
|
—
|
|
|
(245
|
)
|
Goodwill balance at January 28, 2017
|
1,729
|
|
|
9,966
|
|
|
21,472
|
|
|
933
|
|
|
34,100
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
Acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
566
|
|
|
566
|
|
Translation adjustments
|
36
|
|
|
6
|
|
|
3,653
|
|
|
120
|
|
|
3,815
|
|
Goodwill balance at February 3, 2018
|
$
|
1,765
|
|
|
$
|
9,972
|
|
|
$
|
25,125
|
|
|
$
|
1,619
|
|
|
$
|
38,481
|
|
The Company has
no
accumulated impairment related to goodwill.
From time-to-time, the Company may acquire certain retail locations from its wholesale partners which may result in the recognition of goodwill or other intangible assets. During fiscal 2018, the Company recognized goodwill of approximately
$0.6 million
related to the acquisition of
14
retail locations from
three
of its Asian wholesale partners. During fiscal 2017, the Company recognized goodwill of approximately
$0.9 million
related to the acquisition of
12
retail locations from
five
of its Asian wholesale partners.
Other intangible assets as of
February 3, 2018
consisted primarily of lease and license acquisition costs related to European acquisitions. Gross intangible assets were
$33.6 million
and
$29.7 million
as of
February 3, 2018
and
January 28, 2017
, respectively. The accumulated amortization of intangible assets with finite useful lives was
$27.6 million
and
$23.2 million
for the years ended
February 3, 2018
and
January 28, 2017
, respectively. For these assets, amortization expense over the next five years is expected to be approximately
$1.2 million
in fiscal
2019
,
$1.0 million
in fiscal
2020
,
$0.9 million
in fiscal
2021
,
$0.8 million
in fiscal
2022
and
$0.7 million
in fiscal
2023
.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) Accrued Expenses
Accrued expenses are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
Accrued compensation and benefits
|
$
|
73,815
|
|
|
$
|
50,954
|
|
Sales and use taxes, property taxes and other indirect taxes
|
33,390
|
|
|
22,480
|
|
Derivative financial instruments
|
16,487
|
|
|
1,408
|
|
Professional and legal fees
|
14,281
|
|
|
7,982
|
|
Store credits, loyalty and gift cards
|
9,846
|
|
|
9,519
|
|
Advertising
|
9,677
|
|
|
7,746
|
|
Accrued rent
|
8,039
|
|
|
6,342
|
|
Deferred royalties and other revenue
|
7,273
|
|
|
7,891
|
|
Share repurchase
|
6,033
|
|
|
—
|
|
Income taxes
|
5,186
|
|
|
653
|
|
Construction costs
|
3,428
|
|
|
4,210
|
|
Retail sales returns allowance
|
2,917
|
|
|
2,723
|
|
Restructuring charges
|
—
|
|
|
180
|
|
Other
|
10,190
|
|
|
13,183
|
|
|
$
|
200,562
|
|
|
$
|
135,271
|
|
(
8
) Borrowings and Capital Lease Obligations
Borrowings and capital lease obligations are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
Mortgage debt, maturing monthly through January 2026
|
$
|
20,323
|
|
|
$
|
20,889
|
|
Capital lease obligations
|
18,589
|
|
|
—
|
|
Other
|
3,129
|
|
|
3,159
|
|
|
42,041
|
|
|
24,048
|
|
Less current installments
|
2,845
|
|
|
566
|
|
Long-term debt and capital lease obligations
|
$
|
39,196
|
|
|
$
|
23,482
|
|
Mortgage Debt
On
February 16, 2016
, the Company entered into a
ten
-year $
21.5 million
real estate secured loan
(the “
Mortgage Debt
”)
. The
Mortgage Debt
is
secured by the Company’s U.S. distribution center based in Louisville, Kentucky
and provides for monthly principal and interest payments based on a
25
-year amortization schedule, with the remaining principal balance and any accrued and unpaid interest due at maturity. Outstanding principal balances under the
Mortgage Debt
bear interest at the one-month LIBOR rate plus
1.5%
. As of
February 3, 2018
, outstanding borrowings under the
Mortgage Debt
, net of debt issuance costs of $
0.1 million
, were $
20.3 million
. At
January 28, 2017
, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $
0.1 million
, were $
20.9 million
.
The
Mortgage Debt
requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if consolidated cash, cash equivalents and short term investment balances fall below certain levels. In addition, the
Mortgage Debt
contains customary covenants, including covenants that limit or restrict the Company’s ability to incur liens on the mortgaged property and enter into certain contractual obligations. Upon the occurrence of an event of default under the
Mortgage Debt
, the lender may terminate the
Mortgage Debt
and declare all amounts outstanding to be immediately due and payable. The
Mortgage Debt
specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
On
February 16, 2016
, the Company also entered into a separate interest rate swap agreement, designated as a cash flow hedge, that resulted in a swap fixed rate of approximately
3.06%
. This interest rate swap agreement matures
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in
January 2026
and converts the nature of the
Mortgage Debt
from LIBOR floating-rate debt to fixed-rate debt. The fair value of the interest rate swap asset
was approximately $
1.5 million
and
$0.9 million
as of
February 3, 2018
and
January 28, 2017
, respectively.
Capital Lease Obligations
During fiscal 2018, the Company began the relocation of its European distribution center to the Netherlands
. As a result, the Company
entered into a capital lease
of $
17.0 million
for equipment used in the new facility.
The capital lease primarily provides for monthly minimum lease payments through
May 2027
with an effective interest rate of approximately
6%
. As of
February 3, 2018
, the capital lease obligation was $
17.3 million
.
During fiscal 2018, the Company also entered into a capital lease
for $
1.5 million
related primarily to computer hardware and software.
As of
February 3, 2018
, this capital lease obligation was $
1.3 million
.
The Company previously leased a building in Florence, Italy under a capital lease which provided for minimum lease payments through
May 1, 2016
. Upon termination of the capital lease, the title of the building was transferred to the Company. The Company had a separate interest rate swap agreement designated as a non-hedging instrument that converted the nature of the capital lease obligation from Euribor floating-rate debt to fixed-rate debt and resulted in a swap fixed rate of
3.55%
. This interest rate swap agreement matured on
February 1, 2016
.
Credit Facilities
On June 23, 2015, the Company entered into a
five
-year senior secured asset-based revolving credit facility with Bank of America, N.A. and the other lenders party thereto (the “Credit Facility”). The Credit Facility provides for a borrowing capacity in an amount up to
$150 million
, including a Canadian sub-facility up to
$50 million
, subject to a borrowing base. Based on applicable accounts receivable, inventory, eligible cash balances and relevant covenant restrictions as of
February 3, 2018
, the Company could have borrowed up to
$87 million
under the Credit Facility. The Credit Facility has an option to expand the borrowing capacity by up to
$150 million
subject to certain terms and conditions, including the willingness of existing or new lenders to assume such increased amount. The Credit Facility is available for direct borrowings and the issuance of letters of credit, subject to certain letters of credit sublimits, and may be used for working capital and other general corporate purposes.
All obligations under the Credit Facility are unconditionally guaranteed by the Company and the Company’s existing and future domestic and Canadian subsidiaries, subject to certain exceptions, and are
secured by a first priority lien on substantially all of the assets of the Company and such domestic and Canadian subsidiaries
, as applicable.
Direct borrowings under the Credit Facility made by the Company and its domestic subsidiaries shall bear interest at the U.S. base rate plus an applicable margin (varying from
0.25%
to
0.75%
) or at LIBOR plus an applicable margin (varying from
1.25%
to
1.75%
). The U.S. base rate is based on the greater of (i) the U.S. prime rate, (ii) the federal funds rate, plus
0.5%
, and (iii) LIBOR for a 30 day interest period, plus
1.0%
. Direct borrowings under the Credit Facility made by the Company’s Canadian subsidiaries shall bear interest at the Canadian prime rate plus an applicable margin (varying from
0.25%
to
0.75%
) or at the Canadian BA rate plus an applicable margin (varying from
1.25%
to
1.75%
). The Canadian prime rate is based on the greater of (i) the Canadian prime rate, (ii) the Bank of Canada overnight rate, plus
0.5%
, and (iii) the Canadian BA rate for a one month interest period, plus
1.0%
. The applicable margins are calculated quarterly and vary based on the average daily availability of the aggregate borrowing base. The Company is also obligated to pay certain commitment, letter of credit and other fees customary for a credit facility of this size and type. As of
February 3, 2018
, the Company had
$1.0 million
in outstanding standby letters of credit,
no
outstanding documentary letters of credit and
no
outstanding borrowings under the Credit Facility.
The Credit Facility requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if a default or an event of default occurs under the Credit Facility or generally if borrowings exceed
80%
of the borrowing base. In addition, the Credit Facility contains customary covenants, including covenants that limit or restrict the Company and certain of its subsidiaries’ ability to: incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. Upon the occurrence of an event of default under the Credit Facility, the lenders may cease making loans, terminate the Credit Facility and declare all amounts outstanding to be immediately due and
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
payable. The Credit Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults. The Credit Facility allows for both secured and unsecured borrowings outside of the Credit Facility up to specified amounts.
The Company, through its European subsidiaries, maintains short-term uncommitted borrowing agreements, primarily for working capital purposes, with various banks in Europe. The majority of the borrowings under these agreements are secured by specific accounts receivable balances. Based on the applicable accounts receivable balances as of
February 3, 2018
, the Company could have borrowed up to
$87.5 million
under these agreements. As of
February 3, 2018
, the Company had
no
outstanding borrowings or
outstanding documentary letters of credit under these agreements. The agreements are denominated primarily in euros and provide for annual interest rates ranging from
0.5%
to
4.6%
. The maturities of any short-term borrowings under these arrangements are generally linked to the credit terms of the underlying accounts receivable that secure the borrowings. With the exception of
one
facility for up to
$43.6 million
that has a minimum net equity requirement, there are no other financial ratio covenants.
Other
From time-to-time, the Company will obtain other financing in foreign countries for working capital to finance its local operations.
Maturities of the Company’s debt and capital lease obligations as of
February 3, 2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
Capital Lease
|
|
Total
|
Fiscal 2019
|
$
|
1,361
|
|
|
$
|
1,594
|
|
|
$
|
2,955
|
|
Fiscal 2020
|
1,893
|
|
|
1,767
|
|
|
3,660
|
|
Fiscal 2021
|
1,725
|
|
|
1,923
|
|
|
3,648
|
|
Fiscal 2022
|
659
|
|
|
1,944
|
|
|
2,603
|
|
Fiscal 2023
|
682
|
|
|
1,895
|
|
|
2,577
|
|
Thereafter
|
17,221
|
|
|
9,466
|
|
|
26,687
|
|
Total principal payments
|
23,541
|
|
|
18,589
|
|
|
42,130
|
|
Less unamortized debt issuance costs
|
89
|
|
|
—
|
|
|
89
|
|
Total debt and capital lease obligations
|
$
|
23,452
|
|
|
$
|
18,589
|
|
|
$
|
42,041
|
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(
9
) Restructuring Charges
During the first quarter of fiscal 2017, the Company implemented a global cost reduction and restructuring plan to better align its global cost and organizational structure with its current strategic initiatives. This plan included the consolidation and streamlining of the Company’s business processes and a reduction in its global workforce and other expenses. These actions resulted in restructuring charges related primarily to cash-based severance costs of
$6.1 million
during fiscal
2017. There were
no
restructuring charges incurred during fiscal
2018
. The Company does not expect significant future cash-based severance charges to be incurred under this plan as the actions were completed during fiscal 2017. As of
February 3, 2018
, there were
no
amounts included in accrued expenses related to these restructuring activities as the Company completed payments for the remaining anticipated costs during fiscal 2018. At January 28, 2017, the Company had a balance of approximately
$0.2 million
in accrued expenses related to these restructuring activities.
The following table summarizes restructuring activities related primarily to severance during fiscal 2017 and fiscal
2018
(in thousands):
|
|
|
|
|
|
|
|
Total
|
Balance at January 30, 2016
|
|
$
|
—
|
|
Charges to operations
|
|
6,083
|
|
Cash payments
|
|
(6,003
|
)
|
Foreign currency and other adjustments
|
|
100
|
|
Balance at January 28, 2017
|
|
$
|
180
|
|
Cash payments
|
|
(124
|
)
|
Foreign currency and other adjustments
|
|
(56
|
)
|
Balance at February 3, 2018
|
|
$
|
—
|
|
During fiscal
2017
, the Company also incurred an estimated exit tax charge of approximately
$1.9 million
related to its reorganization in Europe as a result of the global cost reduction and restructuring plan. The exit tax charge has not been finalized with the local authorities and actual amounts could differ significantly from these estimates as negotiations are completed.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss), net of related income taxes, for fiscal
2018
, fiscal
2017
and fiscal
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
|
Derivative Financial Instruments Designated as Cash Flow Hedges
|
|
Marketable Securities
|
|
Defined Benefit Plans
|
|
Total
|
Balance at January 31, 2015
|
$
|
(121,569
|
)
|
|
$
|
7,157
|
|
|
$
|
(3
|
)
|
|
$
|
(12,650
|
)
|
|
$
|
(127,065
|
)
|
Gains (losses) arising during the period
|
(36,083
|
)
|
|
7,944
|
|
|
(12
|
)
|
|
5,468
|
|
|
(22,683
|
)
|
Reclassification to net earnings for gains realized
|
—
|
|
|
(7,849
|
)
|
|
—
|
|
|
(457
|
)
|
|
(8,306
|
)
|
Net other comprehensive income (loss)
|
(36,083
|
)
|
|
95
|
|
|
(12
|
)
|
|
5,011
|
|
|
(30,989
|
)
|
Balance at January 30, 2016
|
$
|
(157,652
|
)
|
|
$
|
7,252
|
|
|
$
|
(15
|
)
|
|
$
|
(7,639
|
)
|
|
$
|
(158,054
|
)
|
Gains (losses) arising during the period
|
(575
|
)
|
|
1,059
|
|
|
(1
|
)
|
|
(1,162
|
)
|
|
(679
|
)
|
Reclassification to net earnings for (gains) losses realized
|
—
|
|
|
(2,911
|
)
|
|
16
|
|
|
239
|
|
|
(2,656
|
)
|
Net other comprehensive income (loss)
|
(575
|
)
|
|
(1,852
|
)
|
|
15
|
|
|
(923
|
)
|
|
(3,335
|
)
|
Balance at January 28, 2017
|
$
|
(158,227
|
)
|
|
$
|
5,400
|
|
|
$
|
—
|
|
|
$
|
(8,562
|
)
|
|
$
|
(161,389
|
)
|
Gains (losses) arising during the period
|
91,178
|
|
|
(20,408
|
)
|
|
—
|
|
|
(1,999
|
)
|
|
68,771
|
|
Reclassification to net loss for (gains) losses realized
|
—
|
|
|
414
|
|
|
—
|
|
|
352
|
|
|
766
|
|
Net other comprehensive income (loss)
|
91,178
|
|
|
(19,994
|
)
|
|
—
|
|
|
(1,647
|
)
|
|
69,537
|
|
Cumulative adjustment reclassified to retained earnings from adoption of new accounting guidance (1)
|
—
|
|
|
225
|
|
|
—
|
|
|
(1,435
|
)
|
|
(1,210
|
)
|
Balance at February 3, 2018
|
$
|
(67,049
|
)
|
|
$
|
(14,369
|
)
|
|
$
|
—
|
|
|
$
|
(11,644
|
)
|
|
$
|
(93,062
|
)
|
________________________________________________________________________
|
|
(1)
|
During the fourth quarter of fiscal 2018, the Company early adopted authoritative guidance which addresses
certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the
Tax Reform
enacted in December 2017
.
As a result, the Company recorded a cumulative adjustment to increase retained earnings by
$1.2 million
with a corresponding reduction to accumulated other comprehensive income (loss) related to the Company’s Supplemental Executive Retirement Plan and its interest rate swap designated as a cash flow hedge based in the U.S.
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Details on reclassifications out of accumulated other comprehensive income (loss) to net earnings (loss) during fiscal
2018
, fiscal
2017
and fiscal
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of (Gain) Loss
Reclassified from
Accumulated OCI
into Earnings (Loss)
|
|
Year Ended
Feb 3, 2018
|
|
Year Ended
Jan 28, 2017
|
|
Year Ended
Jan 30, 2016
|
|
Derivative financial instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
$
|
(14
|
)
|
|
$
|
(3,518
|
)
|
|
$
|
(8,314
|
)
|
|
Cost of product sales
|
Foreign exchange currency contracts
|
583
|
|
|
(301
|
)
|
|
(833
|
)
|
|
Other income/expense
|
Interest rate swap
|
87
|
|
|
216
|
|
|
—
|
|
|
Interest expense
|
Less income tax effect
|
(242
|
)
|
|
692
|
|
|
1,298
|
|
|
Income tax expense
|
|
414
|
|
|
(2,911
|
)
|
|
(7,849
|
)
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
—
|
|
|
25
|
|
|
—
|
|
|
Other income/expense
|
Less income tax effect
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
Income tax expense
|
|
—
|
|
|
16
|
|
|
—
|
|
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
Net actuarial loss amortization
|
462
|
|
|
341
|
|
|
924
|
|
|
(1)
|
Prior service credit amortization
|
(27
|
)
|
|
(28
|
)
|
|
(97
|
)
|
|
(1)
|
Curtailment
|
—
|
|
|
—
|
|
|
(1,651
|
)
|
|
(1)
|
Less income tax effect
|
(83
|
)
|
|
(74
|
)
|
|
367
|
|
|
Income tax expense
|
|
352
|
|
|
239
|
|
|
(457
|
)
|
|
|
Total reclassifications to net earnings (loss) for (gains) losses realized during the period
|
$
|
766
|
|
|
$
|
(2,656
|
)
|
|
$
|
(8,306
|
)
|
|
|
________________________________________________________________________
|
|
(1)
|
These accumulated other comprehensive income (loss) components are included in the computation of net periodic defined benefit pension cost. Refer to Note
12
for further information.
|
(
11
) Income Taxes
Changes in Tax Law
In December 2017, the
2017 Tax Cuts and Jobs Act in the U.S. (referred to herein as the “Tax Reform”)
, was enacted into law.
The Tax Reform includes significant changes to the U.S. corporate income tax system, including a
reduction in the U.S. federal corporate income tax rate from 35% to 21% and a
one-time mandatory transition tax on accumulated foreign earnings.
The Tax Reform also establishes new tax laws that will be effective for calendar 2018, including but not limited to (i) a new provision designed to tax global intangible low-taxed income (“GILTI”), (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, (iii) a limitation on deductible interest expense and (iv) limitations on the deductibility of certain executive compensation.
The Securities and Exchange Commission (“SEC”) issued authoritative guidance which addresses accounting for the impact of the Tax Reform. This guidance provides a measurement period, which should not extend beyond one year from the enactment date, during which the Company may finalize the accounting for the impacts of the Tax Reform, and allows for the Company to record provisional estimates of such amounts. As a result, during fiscal
2018
, the Company recorded estimated additional income tax expense of
$47.9 million
. This
is comprised of a provisional charge of
$24.9 million
for the re-measurement of U.S. deferred tax assets and a provisional charge of
$23.0 million
for the estimated effects of the transitional tax on the deemed repatriation of foreign earnings
. The
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
income tax payable related to the transition tax is due over an eight year period beginning in calendar 2018. The amount that is payable in the next 12 months is approximately
$1.9 million
and has been included in accrued expenses in the Company’s consolidated balance sheet.
The Company has provided for any additional tax liabilities on amounts that are estimated to be repatriated from foreign operations as a result of the Tax Reform. We have not provided for other income taxes on undistributed foreign earnings expected to be reinvested outside the U.S. If in the future we decide to repatriate such earnings, we would incur other incremental taxes. Our current plans do not indicate a need to repatriate them to fund our U.S. cash requirements
.
Based on the Company’s current interpretation of the Tax Reform, reasonable estimates were made to record provisional adjustments during fiscal 2018. These estimates may change, and the Company will continue to refine such amounts within the measurement period allowed. These estimates may be impacted by a number of additional considerations, including, but not limited to, the state level income tax impacts of the Tax Reform, clarifications of or changes to the Tax Reform (including the issuance of final regulations and evolving technical interpretations), additional guidance issued by the SEC or FASB, and the Company’s ongoing analysis of historical earnings and profits as well as tax pools. The Company continues to analyze the provisions of the Tax Reform, including but not limited to, the creation of a new minimum tax called the base erosion anti-abuse tax; a new provision that taxes U.S. allocated expenses (e.g. interest and general administrative expenses) as well as certain GILTI from foreign operations; a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; a new limitation on deductible interest expense; and limitations on the deductibility of certain employee compensation. Under GAAP, companies are allowed to make an accounting policy election to either treat taxes resulting from GILTI as a current-period expense when they are incurred or factor such amounts into the measurement of deferred taxes. The Company has not completed its analysis of the effects of the GILTI provisions and will further consider the accounting policy election within the measurement period allowed.
During the fourth quarter of fiscal 2018, the Company also early adopted authoritative guidance which addresses
certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the
Tax Reform. As a result, the Company recorded a cumulative adjustment of
$1.2 million
to reclassify the stranded income tax effects from the Tax Reform that were included in accumulated other comprehensive income (loss) to retained earnings.
Income Tax Expense
Income tax expense (benefit) is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Federal:
|
|
|
|
|
|
Current
|
$
|
34,181
|
|
|
$
|
8,212
|
|
|
$
|
23,618
|
|
Deferred
|
21,595
|
|
|
(636
|
)
|
|
4,038
|
|
State:
|
|
|
|
|
|
Current
|
1,903
|
|
|
2,537
|
|
|
3,864
|
|
Deferred
|
217
|
|
|
(1,000
|
)
|
|
(296
|
)
|
Foreign:
|
|
|
|
|
|
Current
|
7,333
|
|
|
17,055
|
|
|
14,259
|
|
Deferred
|
8,943
|
|
|
2,044
|
|
|
(3,019
|
)
|
Total
|
$
|
74,172
|
|
|
$
|
28,212
|
|
|
$
|
42,464
|
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Actual income tax expense differs from expected income tax expense obtained by applying the statutory federal income tax rate to earnings before income taxes as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Computed “expected” tax expense
|
$
|
23,693
|
|
|
$
|
18,763
|
|
|
$
|
44,547
|
|
State taxes, net of federal benefit
|
1,675
|
|
|
999
|
|
|
2,320
|
|
Non-U.S. tax expense less than federal statutory tax rate (1)
|
(7,396
|
)
|
|
(1,539
|
)
|
|
(6,991
|
)
|
Tax Reform - repatriation tax adjustment (2)
|
23,034
|
|
|
—
|
|
|
—
|
|
Tax Reform - deferred tax adjustment (2)
|
24,856
|
|
|
—
|
|
|
—
|
|
Cumulative valuation reserve (3)
|
—
|
|
|
6,830
|
|
|
—
|
|
Valuation reserve (4)
|
9,057
|
|
|
5,841
|
|
|
3,024
|
|
Unrecognized tax benefit
|
537
|
|
|
556
|
|
|
1,123
|
|
Share-based compensation (5)
|
1,309
|
|
|
—
|
|
|
—
|
|
Net tax settlements
|
—
|
|
|
1,894
|
|
|
—
|
|
Sale of minority interest investment
|
—
|
|
|
(2,316
|
)
|
|
—
|
|
Estimated exit tax charge
|
—
|
|
|
1,911
|
|
|
—
|
|
Prior year tax adjustments
|
(88
|
)
|
|
(1,790
|
)
|
|
(2,944
|
)
|
Non-deductible permanent difference
|
(3,224
|
)
|
|
(2,284
|
)
|
|
1,295
|
|
Other
|
719
|
|
|
(653
|
)
|
|
90
|
|
Total
|
$
|
74,172
|
|
|
$
|
28,212
|
|
|
$
|
42,464
|
|
________________________________________________________________________
|
|
(1)
|
The jurisdictional location of pre-tax income (loss) may represent a significant component of the Company’s effective tax rate as income tax rates outside the U.S. are generally lower than the U.S. statutory income tax rate. Furthermore, the impact of changes in the jurisdictional location of pre-tax income (loss) on the Company’s effective tax rate will be greater at lower levels of consolidated pre-tax income (loss). These amounts exclude the impact of net changes in valuation allowances, audit and other adjustments related to the Company’s non-U.S. operations, as they are reported separately in the appropriate corresponding line items in the table above. The impact on the Company’s effective tax rate was primarily related to the Company’s Swiss and Korean subsidiaries which have jurisdictional effective tax rates which range from
8%
to
20%
lower than the U.S. rates in effect for the periods presented.
|
|
|
(2)
|
During fiscal 2018, the Company recognized additional tax expense resulting from the enactment of the Tax Reform to account for the estimated effects of the transitional tax on the deemed repatriation of foreign earnings and reduced deferred tax assets due to lower future U.S. corporate tax rates.
|
|
|
(3)
|
Amounts represent valuation reserves resulting from jurisdictions where there have been cumulative net operating losses, limiting the Company’s ability to consider other subjective evidence to continue to recognize the existing deferred tax assets.
|
|
|
(4)
|
Amounts relate primarily to valuation reserves on non-cumulative net operating losses or other deferred tax assets arising during the respective period.
|
|
|
(5)
|
During fiscal 2018, the Company adopted authoritative guidance which requires all income tax effects of stock awards (resulting from an increase or decrease in the fair value of an award from grant date to the vesting date) to be recognized in the income statement when the awards vest or are settled. This is a change from previous guidance that required such activity to be recorded in paid-in capital within stockholders’ equity.
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total income tax expense
(benefit) is allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Operations (1)
|
$
|
74,172
|
|
|
$
|
28,212
|
|
|
$
|
42,464
|
|
Stockholders’ equity (1)
|
(3,173
|
)
|
|
1,782
|
|
|
4,668
|
|
Total income tax expense
|
$
|
70,999
|
|
|
$
|
29,994
|
|
|
$
|
47,132
|
|
________________________________________________________________________
|
|
(1)
|
During fiscal 2018, the Company adopted authoritative guidance which requires all income tax effects of stock awards (resulting from an increase or decrease in the fair value of an award from grant date to the vesting date) to be recognized in the income statement when the awards vest or are settled. This is a change from previous guidance that required such activity to be recorded in paid-in capital within stockholders’ equity. As a result, the Company recorded tax shortfalls of approximately
$1.3 million
in the Company’s income tax expense during fiscal 2018.
|
The tax effects of the components of other comprehensive income (loss) are allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Derivative financial instruments designated as cash flow hedges
|
$
|
(2,738
|
)
|
|
$
|
(864
|
)
|
|
$
|
559
|
|
Marketable securities
|
—
|
|
|
6
|
|
|
(7
|
)
|
Defined benefit plans
|
(435
|
)
|
|
(21
|
)
|
|
2,972
|
|
Total income tax expense (benefit) (1)
|
$
|
(3,173
|
)
|
|
$
|
(879
|
)
|
|
$
|
3,524
|
|
________________________________________________________________________
|
|
(1)
|
During the fourth quarter of fiscal 2018, the Company early adopted authoritative guidance which addresses
certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the
Tax Reform
enacted in December 2017
.
As a result, the Company recorded a cumulative adjustment to increase retained earnings by
$1.2 million
with a corresponding reduction to accumulated other comprehensive income (loss) related to the Company’s Supplemental Executive Retirement Plan and its interest rate swap designated as a cash flow hedge based in the U.S.
The impact from this reclassification on accumulated other comprehensive income (loss) has been excluded from the amounts provided in this table.
|
Total earnings before income tax expense and noncontrolling interests are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Domestic operations
|
$
|
39,112
|
|
|
$
|
32,944
|
|
|
$
|
90,141
|
|
Foreign operations
|
31,159
|
|
|
20,666
|
|
|
37,138
|
|
Earnings before income tax expense and noncontrolling interests
|
$
|
70,271
|
|
|
$
|
53,610
|
|
|
$
|
127,279
|
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Taxes
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities as of
February 3, 2018
and
January 28, 2017
are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
Deferred tax assets:
|
|
|
|
Net operating losses
|
19,859
|
|
|
13,524
|
|
Defined benefit plans
|
13,155
|
|
|
20,642
|
|
Deferred compensation
|
10,721
|
|
|
12,987
|
|
Excess of book over tax depreciation/amortization
|
10,704
|
|
|
9,018
|
|
Rent expense
|
7,651
|
|
|
13,672
|
|
Deferred income
|
7,141
|
|
|
6,213
|
|
Bad debt reserve
|
2,529
|
|
|
2,124
|
|
Lease incentives
|
1,814
|
|
|
5,545
|
|
Uniform capitalization
|
974
|
|
|
1,900
|
|
Other
|
30,703
|
|
|
28,265
|
|
Total deferred tax assets
|
105,251
|
|
|
113,890
|
|
Deferred tax liabilities:
|
|
|
|
Goodwill amortization
|
(2,303
|
)
|
|
(3,654
|
)
|
Excess of tax over book depreciation/amortization
|
(135
|
)
|
|
(189
|
)
|
Other
|
(4,517
|
)
|
|
(4,544
|
)
|
Valuation allowance
|
(32,601
|
)
|
|
(23,255
|
)
|
Net deferred tax assets (1)
|
$
|
65,695
|
|
|
$
|
82,248
|
|
__________________________________________________________________
|
|
(1)
|
As of
February 3, 2018
, amount includes net deferred tax liabilities of
$2.7 million
recorded in other long-term liabilities in the Company’s consolidated balance sheet. There were
$0.5 million
net deferred tax liabilities recorded in other long-term liabilities in the Company’s consolidated balance sheet at
January 28, 2017
.
|
Based on the historical earnings of the Company and projections of future taxable earnings in certain jurisdictions, management believes
it is more likely than not that the results of operations will not generate sufficient taxable earnings to realize certain net deferred tax assets.
Therefore, the Company has recorded a valuation allowance of
$32.6 million
, which is an
in
crease of
$9.3 million
from the prior year.
As of
February 3, 2018
, certain of the Company’s operations had net operating loss carryforwards of
$74.7 million
. These are comprised of
$17.1 million
of operating loss carryforwards that have an unlimited carryforward life,
$57.0 million
of foreign operating loss carryforwards that expire between fiscal
2019
and fiscal
2038
and
$0.6 million
of state operating loss carryforwards that expire between fiscal
2019
and fiscal
2036
. Based on the historical earnings of these operations, management believes that it is more likely than not that some of the operations will not generate sufficient earnings to utilize all of the net operating loss. As of
February 3, 2018
and
January 28, 2017
, the Company had a valuation allowance of
$20.4 million
and
$13.9 million
, respectively, related to its net operating loss carryforwards.
Unrecognized Tax Benefit
The Company and its subsidiaries are subject to U.S. federal and foreign income tax as well as income tax of multiple state and foreign local jurisdictions. From time-to-time, the Company is subject to routine income tax audits on various tax matters around the world in the ordinary course of business. Although the Company has substantially concluded all U.S. federal, foreign, state and foreign local income tax matters for years through fiscal
2012
, as of
February 3, 2018
, several income tax audits were underway in multiple jurisdictions for various periods after fiscal
2012
. The Company does not believe that the resolution of open matters will have a material effect on the Company’s financial position or liquidity.
The
Company accrues an amount for its estimate of 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 tax positions”). The
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company reviews and updates the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefit (excluding interest and penalties) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Beginning balance
|
$
|
12,983
|
|
|
$
|
12,585
|
|
|
$
|
13,640
|
|
Additions:
|
|
|
|
|
|
Tax positions related to the prior year
|
4,436
|
|
|
672
|
|
|
496
|
|
Tax positions related to the current year
|
222
|
|
|
106
|
|
|
1,516
|
|
Reductions:
|
|
|
|
|
|
Tax positions related to the prior year
|
(356
|
)
|
|
(380
|
)
|
|
(1,650
|
)
|
Tax positions related to the current year
|
(309
|
)
|
|
—
|
|
|
(359
|
)
|
Settlements
|
—
|
|
|
—
|
|
|
(505
|
)
|
Expiration of statutes of limitation
|
(205
|
)
|
|
—
|
|
|
(553
|
)
|
Ending balance
|
$
|
16,771
|
|
|
$
|
12,983
|
|
|
$
|
12,585
|
|
The amount of unrecognized tax benefit as of
February 3, 2018
includes
$17.4 million
(net of federal benefit on state issues) which, if ultimately recognized, may reduce our future annual effective tax rate. As of
February 3, 2018
and
January 28, 2017
, the Company had
$19.0 million
and
$14.6 million
, respectively, of aggregate accruals for uncertain tax positions, including penalties and interest.
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company included interest and penalties related to uncertain tax positions of
$0.5 million
,
$0.2 million
and
$0.6 million
in net income tax expense for fiscal
2018
, fiscal
2017
and fiscal
2016
, respectively. Total interest and penalties related to uncertain tax positions was
$2.2 million
and
$1.6 million
for the years ended
February 3, 2018
and
January 28, 2017
, respectively.
(
12
) Defined Benefit Plans
The Company maintains defined benefit plans for certain employees primarily in the U.S. and Switzerland.
In accordance with authoritative guidance for defined benefit pension and other postretirement plans, an asset for a plan’s overfunded status or a liability for a plan’s underfunded status is recognized in the consolidated balance sheets; plan assets and obligations that determine the plan’s funded status are measured as of the end of the Company’s fiscal year; and changes in the funded status of defined benefit postretirement plans are recognized in the year in which they occur. Such changes are reported in other comprehensive income (loss) as a separate component of stockholders’ equity.
The Company’s pension obligations and related costs are calculated using actuarial concepts, within the authoritative guidance framework
, and are considered Level 3 inputs as defined in Note 20.
The Company uses the corridor approach to amortize unrecognized actuarial gains or losses over the average remaining service life of active participants. The life expectancy, estimated retirement age, discount rate, estimated future compensation and expected return on plan assets are important elements of expense and/or liability measurement. These critical assumptions are evaluated annually which enables expected future payments for benefits to be stated at present value on the measurement date. If actual results are not consistent with actuarial assumptions, the amounts recognized for the defined benefit plans could change significantly.
Supplemental Executive Retirement Plan
On August 23, 2005, the Board of Directors of the Company adopted a Supplemental Executive Retirement Plan (“SERP”) which became effective January 1, 2006. The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment, death, disability or a change in control of the Company, in certain prescribed circumstances.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In fiscal 2016, the SERP was amended in connection with Paul Marciano’s transition from Chief Executive Officer to Executive Chairman of the Board and Chief Creative Officer. This amendment effectively eliminated any future salary progression by finalizing compensation levels for future benefits. Mr. Marciano will continue to be eligible to receive SERP benefits in the future in accordance with the amended terms of the SERP. Subsequent to this amendment, there are
no
employees considered actively participating under the terms of the SERP.
As a result, the Company included an actuarial gain of
$11.4 million
before taxes in accumulated other comprehensive income (loss) during fiscal 2016. In addition, the Company also recognized a curtailment gain of
$1.7 million
before taxes related to the accelerated amortization of the remaining prior service credit during fiscal 2016.
As a non-qualified pension plan, no dedicated funding of the SERP is required; however, the Company has made periodic payments into insurance policies held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP. The amount of any future payments into the insurance policies, if any, may vary depending on investment performance of the trust. The cash surrender values of the insurance policies were
$64.5 million
and
$58.6 million
as of
February 3, 2018
and
January 28, 2017
, respectively, and were included in other assets in the Company’s consolidated balance sheets. As a result of changes in the value of the insurance policy investments, the Company recorded unrealized
gains (losses)
of
$7.7 million
,
$6.9 million
and
($1.8) million
in other
income and expense
during fiscal
2018
, fiscal
2017
and fiscal
2016
, respectively.
The Company also recorded realized gains of
$
0.7 million
in other income resulting from payout on the insurance policies during fiscal 2016.
The Company assumed a discount rate of approximately
3.5%
for both of the years ended
February 3, 2018
and
January 28, 2017
, as part of the actuarial valuation performed to calculate the projected benefit obligation, based on the timing of cash flows expected to be made in the future to the participants, applied to high quality yield curves. In fiscal 2016, the Company amended the SERP to effectively eliminate any future salary progression by finalizing compensation levels for future benefits. Prior to the amendment, compensation levels utilized in calculating the projected benefit obligation were derived from expected future compensation as outlined in employment contracts in effect at the time. The Company also considers recent updates to the mortality tables and mortality improvement scale published by the Society of Actuaries in developing its best estimate of the expected mortality rates for its plan participants.
As of
February 3, 2018
, accumulated other comprehensive income (loss) included actuarial losses of
$0.2 million
that are expected to be amortized and recognized as a component of net periodic defined benefit pension cost in fiscal
2019
. Aggregate benefits projected to be paid in the next five fiscal years are approximately $
1.7 million
in fiscal
2019
, $
3.7 million
in fiscal
2020
,
$3.9 million
in fiscal
2021
,
$3.9 million
in fiscal
2022
and
$3.9 million
in fiscal
2023
. Aggregate benefits projected to be paid in the following five fiscal years amount to
$18.5 million
.
Foreign Pension Plans
In certain foreign jurisdictions, primarily in Switzerland, the Company is required to guarantee the returns on Company sponsored defined contribution plans in accordance with local regulations. These plans are typically government-mandated defined contribution plans that provide employees with a minimum investment return, and as such, are treated under pension accounting in accordance with authoritative guidance. The minimum investment return for our Swiss pension plan was
1.00%
and
1.25%
during calendar 2017 and calendar 2016, respectively. Under the Swiss pension plan, both the Company and certain of its employees with annual earnings in excess of government determined amounts are required to make contributions into a fund managed by an independent investment fiduciary. The Company’s contributions must be made in an amount at least equal to the employee’s contribution. Minimum employee contributions are based on the respective employee’s age, salary and gender.
During fiscal 2016, the Swiss pension plan was amended to update the conversion rate for future periods. As a result, the projected benefit obligation and prior service cost were reduced by
$0.2 million
during fiscal 2016.
As of
February 3, 2018
and
January 28, 2017
, actuarial assumptions used by the Company to calculate the projected benefit obligation and the fair value of the plans assets related to its Swiss pension plan included discount rates of
0.60%
and
0.50%
, respectively, and expected returns on plan assets of
1.40%
for both periods.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
February 3, 2018
, accumulated other comprehensive income (loss) included actuarial losses of
$0.4 million
that are expected to be amortized and recognized as a component of net periodic defined benefit pension cost in fiscal
2019
.
The components of net periodic defined benefit pension cost to accumulated comprehensive income (loss) for fiscal
2018
, fiscal
2017
and fiscal
2016
related to the Company’s defined benefit plans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended February 3, 2018
|
|
SERP
|
|
Foreign Pension
Plans
|
|
Total
|
Service cost
|
$
|
—
|
|
|
$
|
2,500
|
|
|
$
|
2,500
|
|
Interest cost
|
1,844
|
|
|
147
|
|
|
1,991
|
|
Expected return on plan assets
|
—
|
|
|
(244
|
)
|
|
(244
|
)
|
Net amortization of unrecognized prior service credit
|
—
|
|
|
(27
|
)
|
|
(27
|
)
|
Net amortization of actuarial losses
|
151
|
|
|
311
|
|
|
462
|
|
Net periodic defined benefit pension cost
|
$
|
1,995
|
|
|
$
|
2,687
|
|
|
$
|
4,682
|
|
Unrecognized prior service credit charged to comprehensive income (loss)
|
$
|
—
|
|
|
$
|
(27
|
)
|
|
$
|
(27
|
)
|
Unrecognized net actuarial loss charged to comprehensive income (loss)
|
151
|
|
|
311
|
|
|
462
|
|
Net actuarial losses
|
(1,092
|
)
|
|
(1,156
|
)
|
|
(2,248
|
)
|
Foreign currency and other adjustments
|
—
|
|
|
(269
|
)
|
|
(269
|
)
|
Related tax impact
|
360
|
|
|
75
|
|
|
435
|
|
Total periodic defined benefit pension cost and other charges to other comprehensive income (loss)
|
(581
|
)
|
|
(1,066
|
)
|
|
(1,647
|
)
|
Cumulative adjustment reclassified to retained earnings from adoption of new accounting guidance (1)
|
(1,435
|
)
|
|
—
|
|
|
(1,435
|
)
|
Total periodic defined benefit pension cost and other charges to accumulated other comprehensive income (loss)
|
$
|
(2,016
|
)
|
|
$
|
(1,066
|
)
|
|
$
|
(3,082
|
)
|
________________________________________________________________________
|
|
(1)
|
During the fourth quarter of fiscal 2018, the Company early adopted authoritative guidance which addresses
certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the
Tax Reform
enacted in December 2017
. As a result, the Company recorded a cumulative adjustment to increase retained earnings by
$1.4 million
with a corresponding reduction to accumulated other comprehensive income (loss) related to the Company’s SERP.
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 28, 2017
|
|
SERP
|
|
Foreign Pension
Plans
|
|
Total
|
Service cost
|
$
|
—
|
|
|
$
|
1,544
|
|
|
$
|
1,544
|
|
Interest cost
|
1,839
|
|
|
87
|
|
|
1,926
|
|
Expected return on plan assets
|
—
|
|
|
(185
|
)
|
|
(185
|
)
|
Net amortization of unrecognized prior service credit
|
—
|
|
|
(28
|
)
|
|
(28
|
)
|
Net amortization of actuarial losses
|
155
|
|
|
186
|
|
|
341
|
|
Net periodic defined benefit pension cost
|
$
|
1,994
|
|
|
$
|
1,604
|
|
|
$
|
3,598
|
|
Unrecognized prior service credit charged to comprehensive income (loss)
|
$
|
—
|
|
|
$
|
(28
|
)
|
|
$
|
(28
|
)
|
Unrecognized net actuarial loss charged to comprehensive income (loss)
|
155
|
|
|
186
|
|
|
341
|
|
Net actuarial gains (losses)
|
63
|
|
|
(1,248
|
)
|
|
(1,185
|
)
|
Foreign currency and other adjustments
|
—
|
|
|
(72
|
)
|
|
(72
|
)
|
Related tax impact
|
(84
|
)
|
|
105
|
|
|
21
|
|
Total periodic defined benefit pension cost and other charges to other comprehensive income (loss) and accumulated other comprehensive income (loss)
|
$
|
134
|
|
|
$
|
(1,057
|
)
|
|
$
|
(923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 30, 2016
|
|
SERP
|
|
Foreign Pension
Plans
|
|
Total
|
Service cost
|
$
|
—
|
|
|
$
|
1,622
|
|
|
$
|
1,622
|
|
Interest cost
|
1,986
|
|
|
69
|
|
|
2,055
|
|
Expected return on plan assets
|
—
|
|
|
(142
|
)
|
|
(142
|
)
|
Net amortization of unrecognized prior service credit
|
(97
|
)
|
|
—
|
|
|
(97
|
)
|
Net amortization of actuarial losses
|
740
|
|
|
184
|
|
|
924
|
|
Curtailment gain
|
(1,651
|
)
|
|
—
|
|
|
(1,651
|
)
|
Net periodic defined benefit pension cost
|
$
|
978
|
|
|
$
|
1,733
|
|
|
$
|
2,711
|
|
Unrecognized prior service credit charged to comprehensive income (loss)
|
$
|
(97
|
)
|
|
$
|
—
|
|
|
$
|
(97
|
)
|
Unrecognized net actuarial loss charged to comprehensive income (loss)
|
740
|
|
|
184
|
|
|
924
|
|
Curtailment gain
|
(1,651
|
)
|
|
—
|
|
|
(1,651
|
)
|
Net actuarial gains (losses)
|
8,707
|
|
|
(341
|
)
|
|
8,366
|
|
Plan amendment
|
—
|
|
|
167
|
|
|
167
|
|
Foreign currency and other adjustments
|
—
|
|
|
274
|
|
|
274
|
|
Related tax impact
|
(2,945
|
)
|
|
(27
|
)
|
|
(2,972
|
)
|
Total periodic defined benefit pension cost and other charges to other comprehensive income (loss) and accumulated other comprehensive income (loss)
|
$
|
4,754
|
|
|
$
|
257
|
|
|
$
|
5,011
|
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in accumulated other comprehensive income (loss), before tax, as of
February 3, 2018
and
January 28, 2017
are the following amounts that have not yet been recognized in net periodic defined benefit pension cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
SERP
|
|
Foreign Pension
Plans
|
|
Total
|
|
SERP
|
|
Foreign Pension
Plans
|
|
Total
|
Unrecognized prior service credit
|
$
|
—
|
|
|
$
|
(113
|
)
|
|
$
|
(113
|
)
|
|
$
|
—
|
|
|
$
|
(140
|
)
|
|
$
|
(140
|
)
|
Unrecognized net actuarial loss
|
9,454
|
|
|
4,889
|
|
|
14,343
|
|
|
8,513
|
|
|
3,775
|
|
|
12,288
|
|
Total included in accumulated other comprehensive loss
|
$
|
9,454
|
|
|
$
|
4,776
|
|
|
$
|
14,230
|
|
|
$
|
8,513
|
|
|
$
|
3,635
|
|
|
$
|
12,148
|
|
The following table summarizes the funded status of the Company’s defined benefit plans and the amounts recognized in the Company’s consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
Jan 28, 2017
|
|
SERP
|
|
Foreign Pension
Plans
|
|
Total
|
|
SERP
|
|
Foreign Pension
Plans
|
|
Total
|
Projected benefit obligation
|
$
|
(54,760
|
)
|
|
$
|
(26,409
|
)
|
|
$
|
(81,169
|
)
|
|
$
|
(53,521
|
)
|
|
$
|
(19,986
|
)
|
|
$
|
(73,507
|
)
|
Plan assets at fair value (1)
|
—
|
|
|
21,437
|
|
|
21,437
|
|
|
—
|
|
|
16,305
|
|
|
16,305
|
|
Net liability (2)
|
$
|
(54,760
|
)
|
|
$
|
(4,972
|
)
|
|
$
|
(59,732
|
)
|
|
$
|
(53,521
|
)
|
|
$
|
(3,681
|
)
|
|
$
|
(57,202
|
)
|
________________________________________________________________________
|
|
(1)
|
The SERP is a non-qualified pension plan and hence the insurance policies are not considered to be plan assets. Accordingly, the table above does not include the insurance policies with cash surrender values of
$64.5 million
and
$58.6 million
as of
February 3, 2018
and
January 28, 2017
, respectively.
|
|
|
(2)
|
The net liability was included in accrued expenses and other long-term liabilities in the Company’s consolidated balance sheets depending on the expected timing of payments.
|
A reconciliation of the changes in the projected benefit obligation for fiscal
2018
and fiscal
2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation
|
|
SERP
|
|
Foreign Pension
Plans
|
|
Total
|
Balance at January 30, 2016
|
$
|
53,443
|
|
|
$
|
17,577
|
|
|
$
|
71,020
|
|
Service cost
|
—
|
|
|
1,544
|
|
|
1,544
|
|
Interest cost
|
1,839
|
|
|
87
|
|
|
1,926
|
|
Actuarial (gains) losses
|
(63
|
)
|
|
1,067
|
|
|
1,004
|
|
Contributions by plan participants
|
—
|
|
|
1,805
|
|
|
1,805
|
|
Payments
|
(1,698
|
)
|
|
(2,416
|
)
|
|
(4,114
|
)
|
Foreign currency and other adjustments
|
—
|
|
|
322
|
|
|
322
|
|
Balance at January 28, 2017
|
$
|
53,521
|
|
|
$
|
19,986
|
|
|
$
|
73,507
|
|
Service cost
|
—
|
|
|
2,500
|
|
|
2,500
|
|
Interest cost
|
1,844
|
|
|
147
|
|
|
1,991
|
|
Actuarial (gains) losses
|
1,092
|
|
|
1,156
|
|
|
2,248
|
|
Contributions by plan participants
|
—
|
|
|
2,315
|
|
|
2,315
|
|
Payments
|
(1,697
|
)
|
|
(1,373
|
)
|
|
(3,070
|
)
|
Foreign currency and other adjustments
|
—
|
|
|
1,678
|
|
|
1,678
|
|
Balance at February 3, 2018
|
$
|
54,760
|
|
|
$
|
26,409
|
|
|
$
|
81,169
|
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The SERP is a non-qualified pension plan and hence the insurance policies are not considered to be plan assets. Accordingly, the table below does not include the insurance policies with cash surrender values of
$64.5 million
and
$58.6 million
as of
February 3, 2018
and
January 28, 2017
, respectively. A reconciliation of the changes in plan assets for the Foreign Pension Plans for fiscal
2018
and fiscal
2017
is as follows (in thousands):
|
|
|
|
|
|
Plan Assets
|
Balance at January 30, 2016
|
$
|
14,859
|
|
Actual return on plan assets
|
4
|
|
Contributions by employer
|
1,779
|
|
Contributions by plan participants
|
1,805
|
|
Payments
|
(2,416
|
)
|
Foreign currency and other adjustments
|
274
|
|
Balance at January 28, 2017
|
$
|
16,305
|
|
Actual return on plan assets
|
244
|
|
Contributions by employer
|
2,575
|
|
Contributions by plan participants
|
2,315
|
|
Payments
|
(1,373
|
)
|
Foreign currency and other adjustments
|
1,371
|
|
Balance at February 3, 2018
|
$
|
21,437
|
|
(
13
) 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 affiliated with trusts for the respective benefit of Paul Marciano, who is an executive and member of the Board of the Company, and Maurice Marciano, Chairman Emeritus and member of the Board, and certain of their children (the “Marciano Trusts”).
Leases
The Company leases warehouse and administrative facilities, including the Company’s corporate headquarters in Los Angeles, California, from partnerships affiliated with the Marciano Trusts and certain of their affiliates. There were
four
of these leases in effect as of
February 3, 2018
with expiration dates ranging from calendar years
2018
to
2020
.
The Company, through a wholly-owned Canadian subsidiary, leases warehouse and administrative facilities in Montreal, Quebec from a partnership affiliated with the Marciano Trusts.
During fiscal 2018, the Company exercised an option to extend the lease term for an additional
one
-year period ending in
December 2018
.
All other terms of the existing lease remain in full force and effect
.
The Company, through a French subsidiary, leases a showroom and office space located in Paris, France from an entity that is owned in part by an affiliate of the Marciano Trusts.
Due to excess capacity, the lease was amended to reduce the square footage by approximately
5,100
square feet to
16,000
square feet during fiscal 2018
.
The amendment also provided for a corresponding reduction in aggregate rent, common area maintenance charges and property tax expense due to the lower square footage
.
All other terms of the existing lease remain in full force and effect
.
In January 2016, the Company sold an approximately
140,000
square foot parking lot located adjacent to the Company’s corporate headquarters to a partnership affiliated with the Marciano Trusts for a sales price of
$7.5 million
, which was subsequently collected during fiscal 2017. Concurrent with the sale, the Company entered into a lease agreement to lease back the parking lot from the purchaser.
During fiscal 2016, the Company recognized a net gain of approximately
$3.4 million
in other income as a result of these transactions.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate rent, common area maintenance charges and property tax expense recorded under these
four
related party leases for fiscal
2018
, fiscal
2017
and fiscal
2016
were
$4.9 million
,
$5.0 million
and
$5.1 million
, respectively. The Company believes that the terms of the related party leases and parking lot sale have not been significantly affected by the fact that the Company and the lessors are related. Refer to Note
14
for more information on lease commitments.
Aircraft Arrangements
The Company periodically charters aircraft owned by MPM Financial, LLC (“MPM Financial”), an entity affiliated with the Marciano Trusts, through informal arrangements with MPM Financial and independent third party management companies contracted by MPM Financial to manage its aircraft. The total fees paid under these arrangements for fiscal
2018
, fiscal
2017
and fiscal
2016
were approximately
$1.1 million
,
$0.9 million
and
$0.6 million
, respectively.
Other Transactions
During 2015, Georges Marciano, brother of Paul Marciano and Maurice Marciano, filed lawsuits against the Company in Canada and the U.S. related primarily to intellectual property rights in the Marciano name. Armand Marciano, also a brother of Paul Marciano and Maurice Marciano, was later added as a plaintiff to the U.S. lawsuit. In addition to the lawsuits, Georges Marciano opposed various of the Company’s applications for registration of its “Marciano” mark. In December 2015, the parties (including all the Marciano brothers) entered into a settlement agreement and a coexistence agreement whereby: (1) Georges Marciano and Armand Marciano agreed to drop all claims and actions against the Company; (2) the Company agreed to pay Georges Marciano and Armand Marciano a sum of
$100,000
each (which amounts were substantially reimbursed by insurance); (3) the Company clarified the intellectual property rights of Georges Marciano and Armand Marciano in the use of their respective full names; and (4) the parties clarified the Company’s ownership and intellectual property rights in the name “Marciano.”
(
14
) Commitments and Contingencies
Leases
The Company leases its showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under operating lease agreements expiring on various dates through
October 2037
. Some of these leases require the Company to make periodic payments for property taxes, utilities and common area operating expenses. Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from
4%
to
20%
, when specific sales volumes are exceeded. The Company’s concession leases also provide for rents primarily based upon a percentage of annual sales volume which average approximately
35%
of annual sales volume. Some leases include lease incentives, rent abatements and fixed rent escalations, which are amortized and recorded over the initial lease term on a straight-line basis. The Company also leases some of its equipment under operating lease agreements expiring at various dates through
November 2022
.
As discussed in further detail in Note 8, the Company leases equipment as well as computer hardware and software under capital lease obligations.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum property and equipment lease payments under capital leases and non-cancelable operating leases as of
February 3, 2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
Capital Lease
|
|
Non-Related
Parties
|
|
Related
Parties
|
|
Total
|
Fiscal 2019
|
$
|
2,940
|
|
|
$
|
196,321
|
|
|
$
|
4,757
|
|
|
$
|
204,018
|
|
Fiscal 2020
|
2,945
|
|
|
174,521
|
|
|
4,420
|
|
|
181,886
|
|
Fiscal 2021
|
2,934
|
|
|
148,255
|
|
|
2,024
|
|
|
153,213
|
|
Fiscal 2022
|
2,716
|
|
|
124,562
|
|
|
—
|
|
|
127,278
|
|
Fiscal 2023
|
2,590
|
|
|
100,162
|
|
|
—
|
|
|
102,752
|
|
Thereafter
|
10,859
|
|
|
229,880
|
|
|
—
|
|
|
240,739
|
|
Total minimum lease payments
|
$
|
24,984
|
|
|
$
|
973,701
|
|
|
$
|
11,201
|
|
|
$
|
1,009,886
|
|
Less interest
|
(6,395
|
)
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
$
|
18,589
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
(1,594
|
)
|
|
|
|
|
|
|
|
|
|
Long-term capital lease obligations
|
$
|
16,995
|
|
|
|
|
|
|
|
|
|
|
Rental expense for all property and equipment operating leases during fiscal
2018
, fiscal
2017
and fiscal
2016
aggregated
$272.3 million
,
$263.1 million
and
$259.1 million
, respectively, including percentage rent of
$61.2 million
,
$53.0 million
and
$53.7 million
, respectively.
Purchase Commitments
Inventory purchase commitments as of
February 3, 2018
were
$208.1 million
. These purchase commitments can be impacted by various factors, including the scheduling of market weeks, the timing of issuing orders, the timing of the shipment of orders and currency fluctuations.
Incentive Bonuses
Certain officers and key employees of the Company are eligible to receive annual cash incentive bonuses based on the achievement of certain performance criteria. These bonuses are based on performance measures such as earnings from operations of the Company or particular segments thereof, as well as other objective and subjective criteria as determined by the Compensation Committee of the Board of Directors.
Investment Commitments
As of
February 3, 2018
, the Company had an unfunded commitment to invest €
4.5 million
($
5.7 million
) in a private equity fund. Refer to Note
20
for further information.
Legal Proceedings
On May 6, 2009, Gucci America, Inc. filed a complaint in the U.S. District Court for the Southern District of New York against Guess?, Inc. and certain third party licensees for the Company asserting, among other things, trademark and trade dress law violations and unfair competition. The complaint sought injunctive relief, compensatory damages, including treble damages, and certain other relief. Complaints similar to those in the above action have also been filed by Gucci entities against the Company and certain of its subsidiaries in the Court of Milan, Italy, the Intermediate People’s Court of Nanjing, China and the Court of Paris, France. The three-week bench trial in the U.S. matter concluded on April 19, 2012, with the court issuing a preliminary ruling on May 21, 2012 and a final ruling on July 19, 2012. Although the plaintiff was seeking compensation in the U.S. matter in the form of damages of
$26 million
and an accounting of profits of
$99 million
, the final ruling provided for monetary damages of
$2.3 million
against the Company and
$2.3 million
against certain of its licensees. The court also granted narrow injunctions in favor of the plaintiff for certain of the claimed infringements. On August 20, 2012, the appeal period expired without any party having filed an appeal, rendering the judgment final. On May 2, 2013, the Court of Milan ruled in favor of the Company in the Milan, Italy matter. In the ruling, the Court rejected all of the plaintiff’s claims and ordered the cancellation of
three
of the plaintiff’s Italian and
four
of the plaintiff’s European Community trademark registrations. On June 10, 2013, the plaintiff appealed the Court’s ruling in the Milan matter. On September 15, 2014,
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the Court of Appeal of Milan affirmed the majority of the lower Court’s ruling in favor of the Company, but overturned the lower Court’s finding with respect to an unfair competition claim. That portion of the matter is now in a damages phase based on the ruling. On October 16, 2015, the plaintiff appealed the remainder of the Court of Appeal of Milan’s ruling in favor of the Company to the Italian Supreme Court of Cassation. In the China matter, the Intermediate People’s Court of Nanjing, China issued a ruling on November 8, 2013 granting an injunction in favor of the plaintiff for certain of the claimed infringements on handbags and small leather goods and awarding the plaintiff statutory damages in the amount of approximately
$80,000
. The Company strongly disagreed with the Court’s decision and appealed the ruling. On August 31, 2016, the Court of Appeal for the China matter issued a decision in favor of the Company, rejecting all of the plaintiff’s claims. In March 2017, the plaintiff petitioned the China Supreme Court for a retrial of the matter. On January 30, 2015, the Court of Paris ruled in favor of the Company in the France matter, rejecting all of the plaintiff’s claims and partially canceling
two
of the plaintiff’s community trademark registrations and
one
of the plaintiff’s international trademark registrations. On February 17, 2015, the plaintiff appealed the Court of Paris’ ruling.
Although the Company believes that it has a strong position with respect to each of the remaining matters, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcomes will have a material impact on the Company’s financial position or results of operations. The parties are currently engaged in settlement discussions with respect to the remaining matters.
The Company has received customs tax assessment notices from the Italian Customs Agency regarding its customs tax audit of
one
of the Company’s European subsidiaries for the period from
July 2010
through
December 2012
. Such assessments totaled
€9.8 million
(
$12.2 million
), including potential penalties and interest. The Company strongly disagrees with the positions that the Italian Customs Agency has taken and therefore filed appeals with the Milan First Degree Tax Court (“MFDTC”). In May 2015, the MFDTC issued a judgment in favor of the Company in relation to the first set of appeals (covering the period through
September 2010
) and canceled the related assessments totaling
€1.7 million
(
$2.1 million
). In November 2015, the Italian Customs Agency notified the Company of its intent to appeal this first MFDTC judgment. During fiscal 2017, the Appeals Court ruled in favor of the Company and rejected the appeal by the Italian Customs Agency on the first MFDTC judgment. During fiscal 2017, the MFDTC also issued judgments in favor of the Company in relation to the second through seventh set of appeals (covering the period from
October 2010
through
December 2012
) and canceled the related assessments totaling
€8.1 million
(
$10.1 million
). Subsequently, the Italian Customs Agency has appealed the majority of these favorable MFDTC judgments, as well as certain of the Appeals Court judgments. While these MFDTC judgments have been favorable to the Company, there can be no assurances that the Italian Customs Agency will not be successful in its remaining appeals.
It also continues to be possible that the Company will receive similar or even larger assessments for periods subsequent to
December 2012
or other claims or charges related to the matter in the future.
Although the Company believes that it has a strong position and will continue to vigorously defend this matter, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcome will have a material impact on the Company’s financial position or results of operations.
On June 6, 2017, the European Commission notified the Company that it has initiated proceedings to investigate whether certain of the Company’s practices and agreements concerning the distribution of apparel and accessories within the European Union breach European Union competition rules related to cross-border transactions, internet sales limitations and resale price restrictions. The initiation of the proceedings does not mean that the European Commission has made a definitive conclusion regarding whether the Company breached any rules. The Company has cooperated and plans to continue to cooperate with the European Commission, including through responses to requests for information and through changes to certain business practices and agreements, as appropriate. If a violation is ultimately found, a broad range of remedies is potentially available to the European Commission, including imposing a fine and/or injunctive relief prohibiting or restricting certain business practices. As of November 6, 2017, the Company and the European Commission agreed to begin a settlement discussion process to determine if the parties can mutually agree on an outcome of the proceedings. Those discussions are still ongoing. At this point, the Company is unable to predict the timing or outcome of these proceedings, including the magnitude of any potential fine. However, the Company does not currently believe that any changes to its business practices or agreements made in connection with this proceeding will have a material impact on its ongoing business operations within the European Union.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is also involved in various other claims and other matters incidental to the Company’s business, the resolutions of which are not expected to have a material adverse effect on the Company’s financial position or results of operations.
Redeemable Noncontrolling Interests
The Company is party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest for its majority-owned subsidiary, Guess Brasil Comércio e Distribuição S.A. (“Guess Brazil”), which was established through a majority-owned joint venture during fiscal 2014. The put arrangement for Guess Brazil, representing
40%
of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company beginning in the sixth year of the agreement, or sooner in certain limited circumstances, and every third anniversary from the end of the sixth year thereafter subject to certain time restrictions. The redemption value of the Guess Brazil put arrangement is based on a multiple of Guess Brazil’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments, and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s consolidated balance sheet. During fiscal 2017, the Company and the noncontrolling interest holder increased their capital contributions by $
1.7 million
, of which $
1.0 million
was paid by the Company and the remaining amount was paid by the noncontrolling interest holder to retain the same pro-rata interest in Guess Brazil. The carrying value of the redeemable noncontrolling interest related to Guess Brazil was
$1.6 million
and
$1.7 million
as of
February 3, 2018
and
January 28, 2017
, respectively.
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? CIS, LLC (“Guess CIS”), which was established through a majority-owned joint venture during fiscal 2016. The put arrangement for Guess CIS, representing
30%
of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company during the period beginning after the fifth anniversary of the agreement through
December 31, 2025
, or sooner in certain limited circumstances. The redemption value of the Guess CIS put arrangement is based on a multiple of Guess CIS’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s consolidated balance sheet. During fiscal 2016, the Company made an initial contribution of
$2.0 million
. During fiscal 2017, the Company and the noncontrolling interest holder increased their capital contributions by $
5.0 million
, of which $
3.5 million
was paid by the Company and the remaining amount was paid by the noncontrolling interest holder to retain the same pro-rata interest in Guess CIS. During fiscal 2018, the Company and the noncontrolling interest holder made an additional capital contribution totaling
$3.2 million
, of which
$2.2 million
was paid by the Company and the remaining amount was paid by the noncontrolling interest holder to retain the same pro-rata interest in Guess CIS. The carrying value of the redeemable noncontrolling interest related to Guess CIS was
$4.0 million
and
$2.8 million
as of
February 3, 2018
and
January 28, 2017
, respectively.
The Company was previously party to a put arrangement in connection with its now wholly-owned subsidiary, Guess Sud SAS (“Guess Sud”). Under the terms of this put arrangement, which represented
40%
of the total outstanding interest of that subsidiary, the noncontrolling interest holder had the option to exercise the put arrangement at its discretion by providing written notice to the Company any time after
January 30, 2012
. The redemption value of the put arrangement was determined based on a method which approximated fair value. During fiscal 2017, the Company acquired the remaining
40%
interest in Guess Sud for
$4.4 million
.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the total carrying amount of redeemable noncontrolling interests for fiscal
2018
and fiscal
2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
Beginning balance
|
$
|
4,452
|
|
|
$
|
5,252
|
|
Foreign currency translation adjustment
|
187
|
|
|
818
|
|
Purchase of redeemable noncontrolling interest
|
—
|
|
|
(4,445
|
)
|
Noncontrolling interest capital contribution
|
951
|
|
|
2,157
|
|
Redeemable noncontrolling interest redemption value adjustment
|
—
|
|
|
670
|
|
Ending balance
|
$
|
5,590
|
|
|
$
|
4,452
|
|
(15) Savings Plans
The Company established the Guess?, Inc. Savings Plan (the “Savings Plan”) under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, employees (“associates”) may contribute up to
100%
of their compensation per year subject to the elective limits as defined by IRS guidelines and the Company may make matching contributions in amounts not to exceed
3.0%
of the associates’ annual compensation. Investment selections consist of mutual funds and do not include any Company common stock. The Company’s contributions to the Savings Plan amounted to
$1.1 million
,
$1.2 million
and
$1.3 million
for fiscal
2018
, fiscal
2017
and fiscal
2016
, respectively.
Effective January 1, 2006, the Company adopted a Non-qualified Deferred Compensation Plan (the “DCP”). Under the DCP, select employees who satisfy certain eligibility requirements and members of the Board of Directors may make annual irrevocable elections to defer a portion of their base compensation and/or bonuses. The deferred amounts and earnings thereon are payable to participants at specified future distribution dates, upon termination of employment, retirement, disability, death or change in control of the Company, in a lump sum or installments, pursuant to elections under the rules of the DCP. The participants to the DCP have an unsecured contractual commitment by the Company to pay the amounts due under the DCP. The deferred compensation liability as of
February 3, 2018
and
January 28, 2017
was
$13.5 million
and
$11.2 million
, respectively, and was included in accrued expenses and other long-term liabilities in the Company’s consolidated balance sheets depending on the expected timing of payments. The Company has purchased corporate-owned life insurance, which is held in a rabbi trust, to offset this liability. The assets held in the rabbi trust are not available for general corporate purposes except in the event of bankruptcy of the Company. As of
February 3, 2018
and
January 28, 2017
, the long-term asset was
$13.7 million
and
$12.0 million
, respectively. All earnings and expenses of the rabbi trust are reported in the Company’s consolidated statements of income in other income and expense. For fiscal
2018
, fiscal
2017
and fiscal
2016
, the Company incurred unrealized gains (losses) of
$1.7 million
,
$1.5 million
and
$(0.7) million
, respectively, related to the change in the value of the insurance policy investments. During fiscal 2016, the Company also recorded realized gains of
$0.3 million
in other income resulting from payout on the insurance policies. During fiscal 2016, the Company made contributions of
$1.5 million
to the DCP.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Quarterly Information (Unaudited)
The following is a summary of the unaudited quarterly financial information for fiscal
2018
and fiscal
2017
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Periods Ended (1)
|
Year Ended February 3, 2018
|
|
Apr 29,
2017
|
|
Jul 29,
2017
|
|
Oct 28,
2017
|
|
Feb 3,
2018
|
Net revenue (2)
|
|
$
|
454,345
|
|
|
$
|
568,292
|
|
|
$
|
548,953
|
|
|
$
|
792,164
|
|
Gross profit
|
|
144,642
|
|
|
198,027
|
|
|
191,109
|
|
|
295,070
|
|
Net earnings (loss)
|
|
(21,227
|
)
|
|
15,881
|
|
|
(1,662
|
)
|
|
3,107
|
|
Net earnings (loss) attributable to Guess?, Inc.
|
|
(21,293
|
)
|
|
15,219
|
|
|
(2,860
|
)
|
|
1,040
|
|
Net earnings (loss) per common share attributable to common stockholders: (3) (4) (5) (6)
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.26
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.26
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Periods Ended (1)
|
Year Ended January 28, 2017
|
|
Apr 30,
2016
|
|
Jul 30,
2016
|
|
Oct 29,
2016
|
|
Jan 28,
2017
|
Net revenue (2)
|
|
$
|
444,061
|
|
|
$
|
540,412
|
|
|
$
|
531,976
|
|
|
$
|
674,004
|
|
Gross profit
|
|
142,759
|
|
|
185,632
|
|
|
180,242
|
|
|
236,407
|
|
Net earnings
|
|
(25,154
|
)
|
|
32,167
|
|
|
9,729
|
|
|
8,656
|
|
Net earnings attributable to Guess?, Inc.
|
|
(25,178
|
)
|
|
32,269
|
|
|
9,103
|
|
|
6,567
|
|
Net earnings per common share attributable to common stockholders: (3) (4) (5) (7) (8) (9)
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.30
|
)
|
|
$
|
0.38
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
Diluted
|
|
$
|
(0.30
|
)
|
|
$
|
0.38
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
_________________________________________________________________________
|
|
(1)
|
All fiscal quarters presented consisted of 13 weeks with the exception of the quarter ended February 3, 2018 which consisted of 14 weeks.
|
|
|
(2)
|
During the fourth quarter of fiscal 2018,
the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales
.
Accordingly, prior period amounts related to net royalties, net revenue and cost of product sales have been adjusted to conform to the current period presentation
.
This resulted in a decrease to net revenue and cost of product sales of
$4.2 million
,
$5.4 million
and
$5.2 million
during the first, second and third quarters of fiscal
2018
, respectively. This also resulted in a decrease to net revenue and cost of product sales of
$4.8 million
,
$4.5 million
,
$4.3 million
and
$5.3 million
during the first, second, third and fourth quarters of fiscal
2017
, respectively. This reclassification had no impact on previously reported gross profit, net earnings (loss) or net earnings (loss) per share. Refer to Note 1 for further information regarding this reclassification.
|
|
|
(3)
|
Per common share amounts for the quarters and full years have been calculated separately. Accordingly, quarterly amounts may not add to the annual amount because of differences in the average common shares outstanding during each period.
|
|
|
(4)
|
The Company recorded net gains (losses) on lease terminations of
$(11.5) million
and
$0.1 million
during the third and fourth quarters of fiscal
2018
, respectively. There were
no
net gains (losses) on lease terminations recognized during the first or second quarters of fiscal
2018
. During the first and second quarters of fiscal 2017, the Company recorded net gains on lease terminations of
$0.1 million
and
$0.6 million
, respectively. There were
no
net gains (losses) on lease terminations recognized during the third or fourth quarters of fiscal
2017
. Refer to Note 1 for further information regarding net gains (losses) on lease terminations.
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(5)
|
During each of the periods presented,
the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures.
The Company recorded asset impairment charges of
$2.8 million
,
$1.2 million
,
$2.0 million
and
$2.5 million
, respectively, during the first, second, third and fourth quarters of fiscal
2018
. The Company also recorded asset impairment charges of
$0.2 million
,
$0.5 million
,
$0.8 million
and
$32.9 million
, respectively, during the first, second, third and fourth quarters of fiscal
2017
. Refer to Note 5 for further detail regarding asset impairment charges.
|
|
|
(6)
|
During fiscal 2018, the Company recognized additional tax expense of
$47.9 million
related to the enactment of the
Tax Reform
.
This is comprised of a
$24.9 million
charge for the provisional re-measurement of certain deferred taxes and related amounts and a provisional charge of
$23.0 million
to income tax expense for the estimated effects of the transitional tax on the deemed repatriation of foreign earnings
. These charges were recorded during the fourth quarter of fiscal 2018. Refer to Note 11 for further detail.
|
|
|
(7)
|
During fiscal 2017, the Company recorded restructuring charges of
$6.1 million
and a related estimated exit tax charge of approximately
$1.9 million
. The restructuring charges and related estimated exit tax charge were recorded during the three months ended April 30, 2016. Refer to Note 9 for further detail regarding these charges.
|
|
|
(8)
|
During fiscal 2017, the Company sold its minority interest equity holding in a privately-held boutique apparel company for net proceeds of approximately $
34.8 million
, which resulted in a gain of approximately $
22.3 million
which was recorded in other income.
The gain was recorded during the three months ended July 30, 2016.
|
|
|
(9)
|
During fiscal 2017, the Company recorded valuation reserves of
$6.8 million
resulting from jurisdictions where there have been cumulative net operating losses, limiting the Company’s ability to consider other subjective evidence to continue to recognize the existing deferred tax assets.
The Company recorded the valuation reserve during the three months ended January 28, 2017. Refer to Note 11 for further detail.
|
(
17
) Segment Information
The Company’s reportable business segments and respective accounting policies of the segments are the same as those described in Note 1.
Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, net gains (losses) from lease terminations, asset impairment charges and restructuring charges, if any.
Corporate overhead, net gains (losses) from lease terminations, asset impairment charges, restructuring charges, interest income, interest expense and other income and expense are evaluated on a consolidated basis and not allocated to the Company’s business segments.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Segment information is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018 (1)
|
|
Jan 28, 2017 (1)
|
|
Jan 30, 2016 (1)
|
Net revenue:
|
|
|
|
|
|
Americas Retail
|
$
|
833,077
|
|
|
$
|
935,479
|
|
|
$
|
981,942
|
|
Americas Wholesale (2)
|
150,366
|
|
|
146,260
|
|
|
155,594
|
|
Europe (2)
|
998,657
|
|
|
788,194
|
|
|
722,877
|
|
Asia (2)
|
308,899
|
|
|
248,601
|
|
|
240,041
|
|
Licensing (3)
|
72,755
|
|
|
71,919
|
|
|
84,041
|
|
Total net revenue (3)
|
$
|
2,363,754
|
|
|
$
|
2,190,453
|
|
|
$
|
2,184,495
|
|
Earnings (loss) from operations:
|
|
|
|
|
|
Americas Retail (2)
|
$
|
(17,301
|
)
|
|
$
|
(22,816
|
)
|
|
$
|
18,414
|
|
Americas Wholesale (2)
|
25,161
|
|
|
24,190
|
|
|
29,579
|
|
Europe (2)
|
87,376
|
|
|
56,961
|
|
|
53,673
|
|
Asia (2)
|
14,116
|
|
|
(2,381
|
)
|
|
10,309
|
|
Licensing (2)
|
78,102
|
|
|
80,386
|
|
|
92,189
|
|
Total segment earnings from operations
|
187,454
|
|
|
136,340
|
|
|
204,164
|
|
Corporate overhead (2)
|
(102,429
|
)
|
|
(73,859
|
)
|
|
(82,864
|
)
|
Net gains (losses) on lease terminations (2) (4)
|
(11,373
|
)
|
|
695
|
|
|
2,337
|
|
Asset impairment charges (2) (5)
|
(8,479
|
)
|
|
(34,385
|
)
|
|
(2,287
|
)
|
Restructuring charges (6)
|
—
|
|
|
(6,083
|
)
|
|
—
|
|
Total earnings from operations
|
$
|
65,173
|
|
|
$
|
22,708
|
|
|
$
|
121,350
|
|
Capital expenditures:
|
|
|
|
|
|
Americas Retail
|
$
|
16,899
|
|
|
$
|
25,881
|
|
|
$
|
26,384
|
|
Americas Wholesale
|
1,303
|
|
|
3,320
|
|
|
2,854
|
|
Europe
|
46,419
|
|
|
42,080
|
|
|
13,869
|
|
Asia
|
12,111
|
|
|
13,869
|
|
|
6,265
|
|
Licensing
|
—
|
|
|
20
|
|
|
27
|
|
Corporate overhead
|
7,923
|
|
|
5,411
|
|
|
34,445
|
|
Total capital expenditures
|
$
|
84,655
|
|
|
$
|
90,581
|
|
|
$
|
83,844
|
|
|
|
|
|
|
|
|
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
Total assets:
|
|
|
|
Americas Retail
|
$
|
192,917
|
|
|
$
|
240,857
|
|
Americas Wholesale
|
181,548
|
|
|
175,136
|
|
Europe
|
850,886
|
|
|
723,251
|
|
Asia
|
242,232
|
|
|
182,405
|
|
Licensing
|
6,255
|
|
|
19,442
|
|
Corporate overhead
|
181,796
|
|
|
193,395
|
|
Total assets
|
$
|
1,655,634
|
|
|
$
|
1,534,485
|
|
_________________________________________________________________________
|
|
(1)
|
The Company operates on a
52
/
53
-week fiscal year calendar, which ends on the Saturday nearest to January 31 of each year.
The results for fiscal
2018
included the impact of an additional week which occurred during the fourth quarter ended
February 3, 2018
.
|
|
|
(2)
|
During fiscal 2018, net revenue and related costs and expenses for certain globally serviced customers were reclassified into the segment primarily responsible for the relationship. Segment results were also adjusted to exclude corporate performance-based compensation costs, net gains (losses) on lease terminations and asset impairment charges due to the fact that these items are no longer included in the segment results provided to the Company’s chief operating decision maker in order to allocate resources and assess performance
. Accordingly, segment results have been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation.
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(3)
|
During the fourth quarter of fiscal 2018,
the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales
. Accordingly, net revenue has been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation. This reclassification had no impact on previously reported earnings from operations.
|
|
|
(4)
|
During fiscal
2018
, the Company incurred net losses on lease terminations
related primarily to the modification of certain lease agreements held with a common landlord in North America
. During fiscal
2017
and fiscal
2016
, the Company recorded net gains on lease terminations
related primarily to the early termination of certain lease agreements in Europe
. Refer to Note 1 for more information regarding the net gains (losses) on lease terminations.
|
|
|
(5)
|
During each of the years presented, the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures. Refer to Note 5 for more information regarding these asset impairment charges.
|
|
|
(6)
|
Restructuring charges incurred during fiscal 2017 related to plans to better align the Company’s global cost and organizational structure with its current strategic initiatives. Refer to Note 9 for more information regarding these restructuring charges.
|
The table below presents information regarding geographic areas in which the Company operated. Net revenue is classified primarily based on the country where the Company’s customer is located (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018
|
|
Jan 28, 2017 (1)
|
|
Jan 30, 2016 (1)
|
Net revenue:
|
|
|
|
|
|
U.S.
|
$
|
742,620
|
|
|
$
|
836,954
|
|
|
$
|
892,056
|
|
Italy
|
289,299
|
|
|
257,542
|
|
|
245,451
|
|
Canada
|
203,965
|
|
|
220,720
|
|
|
222,470
|
|
South Korea
|
156,101
|
|
|
157,503
|
|
|
162,200
|
|
Other foreign countries
|
971,769
|
|
|
717,734
|
|
|
662,318
|
|
Total net revenue
|
$
|
2,363,754
|
|
|
$
|
2,190,453
|
|
|
$
|
2,184,495
|
|
|
|
|
|
|
|
|
|
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
Long-lived assets:
|
|
|
|
U.S.
|
$
|
109,943
|
|
|
$
|
115,728
|
|
Italy
|
34,884
|
|
|
31,013
|
|
Canada
|
18,845
|
|
|
13,690
|
|
South Korea
|
9,584
|
|
|
8,664
|
|
Other foreign countries
|
187,214
|
|
|
132,921
|
|
Total long-lived assets
|
$
|
360,470
|
|
|
$
|
302,016
|
|
_________________________________________________________________________
|
|
(1)
|
During the fourth quarter of fiscal 2018,
the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales
. Accordingly, net revenue by geographic area has been adjusted for fiscal 2017 and fiscal 2016 to conform to the current period presentation.
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(18) Earnings (Loss) Per Share
The computation of basic and diluted net earnings (loss) per common share attributable to common stockholders is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Net earnings (loss) attributable to Guess?, Inc.
|
$
|
(7,894
|
)
|
|
$
|
22,761
|
|
|
$
|
81,851
|
|
Less net earnings attributable to nonvested restricted stockholders
|
764
|
|
|
527
|
|
|
532
|
|
Net earnings (loss) attributable to common stockholders
|
$
|
(8,658
|
)
|
|
$
|
22,234
|
|
|
$
|
81,319
|
|
|
|
|
|
|
|
Weighted average common shares used in basic computations
|
82,189
|
|
|
83,666
|
|
|
84,264
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options and restricted stock units (1)
|
—
|
|
|
163
|
|
|
261
|
|
Weighted average common shares used in diluted computations
|
82,189
|
|
|
83,829
|
|
|
84,525
|
|
Net earnings (loss) per common share attributable to common stockholders:
|
|
|
|
|
|
Basic
|
$
|
(0.11
|
)
|
|
$
|
0.27
|
|
|
$
|
0.97
|
|
Diluted
|
$
|
(0.11
|
)
|
|
$
|
0.27
|
|
|
$
|
0.96
|
|
_________________________________________________________________________
|
|
(1)
|
For fiscal 2018, there were
652,494
potentially dilutive shares that were not included in the computation of diluted weighted average common shares and common equivalent shares outstanding because their effect would have been antidilutive given the Company’s net loss.
|
For fiscal
2018
, fiscal
2017
and fiscal
2016
, equity awards granted for
2,925,549
,
3,254,259
and
2,737,573
, respectively, of the Company’s common shares were outstanding but were excluded from the computation of diluted weighted average common shares and common equivalent shares outstanding because the assumed proceeds, as calculated under the treasury stock method, resulted in these awards being antidilutive. For fiscal
2018
, the Company also excluded
899,345
nonvested stock units which were subject to the achievement of performance-based vesting conditions from the computation of diluted weighted average common shares and common equivalent shares outstanding because these conditions were not achieved as of
February 3, 2018
. For fiscal
2017
, the Company excluded
473,878
nonvested stock units which were subject to the achievement of performance-based or market-based vesting conditions from the computation of diluted weighted average common shares and common equivalent shares outstanding because these conditions were not achieved as of
January 28, 2017
. For fiscal
2016
, the Company did not exclude any nonvested stock units which were subject to the achievement of performance-based or market-based vesting conditions from the computation of diluted weighted average common shares and common equivalent shares outstanding since these conditions were achieved as of
January 30, 2016
.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(19) Share-Based Compensation
Share-Based Compensation Plans
The Company has
four
share-based compensation plans. The Guess?, Inc. 2004 Equity Incentive Plan (the “Plan”) provides that the Board of Directors may grant stock options and other equity awards to officers, key employees and certain consultants and advisors to the Company or any of its subsidiaries. Effective May 19, 2017, the Plan was amended to increase the authorized issuance of shares from
15,000,000
shares of common stock to
29,100,000
shares of common stock. In addition, the amendment provided that awards granted on or after May 1, 2017 (other than stock options or stock appreciation rights) would be counted against the number of shares available to be issued under the Plan as
3.54
shares for every one share actually issued. The amendment also extended the term through May 19, 2027 and extended the Company’s ability to grant certain performance-based awards under the Plan through the first annual meeting of the Company’s shareholders in calendar 2022. As of
February 3, 2018
and
January 28, 2017
, there were
15,350,428
and
4,092,241
shares available for grant under the Plan, respectively. Stock options granted under the Plan have
ten
-year terms and typically vest and become fully exercisable in increments of
one-fourth
of the shares granted on each anniversary from the date of grant. Stock awards/units granted under the Plan typically vest in increments of
one-fourth
of the shares granted on each anniversary from the date of grant. The three most recent annual grants for stock options and other equity awards had initial vesting periods of
nine months
followed by
three
annual vesting periods.
The Guess?, Inc. Employee Stock Purchase Plan (“ESPP”) allows
qualified employees
to participate in the purchase of designated shares of the Company’s common stock at a price equal to
85%
of the lower of the closing price at the beginning or end of each quarterly stock purchase period.
The Guess?, Inc. 2006 Non-Employee Directors’ Stock Grant and Stock Option Plan (the “Director Plan”) provides for the grant of equity awards to non-employee directors. Effective May 20, 2016, the Director Plan was amended to extend the term through
June 30, 2026
, reduce the authorized issuance of shares from
2,000,000
shares of common stock to
1,850,000
shares of common stock and allow more flexibility to structure compensation arrangements for the Company’s non-employee directors. All other remaining provisions under the Director Plan remained in full force and effect. As of
February 3, 2018
and
January 28, 2017
, there were
495,489
and
582,639
shares available for grant under this plan, respectively.
In addition, the Guess?, Inc. 1996 Equity Incentive Plan, under which equity grants have not been permitted since the approval of the Plan in 2004, continues to govern outstanding awards previously made thereunder.
Performance-Based Awards
The
Company has granted certain nonvested units that require certain minimum performance targets to be achieved in order for these awards to vest
.
Vesting is also subject to continued service requirements through the vesting date
.
If the minimum performance targets are not forecasted to be achieved, no expense is recognized during the period
.
The Company has granted certain nonvested stock units subject to performance-based vesting conditions to select executive officers. Each award of nonvested stock units generally has an initial vesting period from the date of the grant through either (i) the end of the first fiscal year or (ii) the first anniversary of the date of grant, followed by annual vesting periods which may range from
two
-to-
three
years. The nonvested stock units are subject to the achievement of certain performance-based vesting conditions.
The Company has also granted a target number of nonvested stock units to select key management, including certain executive officers. The number of shares that may ultimately vest with respect to each award may range from
0%
up to
200%
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.
Market-Based Awards
The Company has
granted certain nonvested stock units which are subject to market-based performance targets in order for these units to vest. Vesting is also subject to continued service requirements through the vesting date.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The grant date fair value for such nonvested stock units was estimated using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the performance period. Compensation expense for such nonvested stock units is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied.
The Company has granted certain nonvested stock units subject to market-based vesting conditions to select executive officers. 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.
Contingently Returnable Restricted Stock Awards
On July 7, 2015, the Company granted Victor Herrero, the Company’s Chief Executive Officer,
150,000
restricted stock units in addition to certain other stock options and nonvested stock units in connection with an employment agreement entered into between the Company and Mr. Herrero (the “Herrero Employment Agreement”). These
restricted stock units
vested immediately but were considered contingently returnable as a result of a one-year implied service condition set forth in the Herrero Employment Agreement. This service condition was met during the year ended January 28, 2017.
Compensation expense for these restricted stock units was recognized on a straight-line basis over the implied service period.
Share-Based Compensation Expense
Compensation expense for nonvested stock options and stock awards/units that are not subject to performance-based vesting conditions is recognized on a straight-line basis over the vesting period
.
Compensation expense for performance-based awards that vest in increments is recognized based on an accelerated attribution method
.
During fiscal 2018, the Company adopted authoritative guidance which eliminates the requirement to estimate forfeitures, but rather provides for an election that would allow entities to account for forfeitures as they occur.
The Company adopted this election using the modified retrospective method and recorded a cumulative adjustment to reduce retained earnings by approximately
$0.3 million
as of the beginning of the period of adoption.
The following table summarizes the share-based compensation expense recognized under all of the Company’s stock plans during fiscal
2018
, fiscal
2017
and fiscal
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Stock options
|
$
|
2,345
|
|
|
$
|
2,219
|
|
|
$
|
2,113
|
|
Stock awards/units
|
16,347
|
|
|
14,544
|
|
|
16,604
|
|
ESPP
|
160
|
|
|
145
|
|
|
163
|
|
Total share-based compensation expense
|
$
|
18,852
|
|
|
$
|
16,908
|
|
|
$
|
18,880
|
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock options
The following table summarizes the stock option activity under all of the Company’s stock plans during fiscal
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value ($000’s)
|
Options outstanding at January 28, 2017
|
2,857,012
|
|
|
$
|
24.30
|
|
|
|
|
|
|
Granted
|
1,283,175
|
|
|
11.22
|
|
|
|
|
|
|
Exercised
|
(123,775
|
)
|
|
11.22
|
|
|
|
|
|
|
Forfeited
|
(88,625
|
)
|
|
25.39
|
|
|
|
|
|
|
Expired
|
(15,375
|
)
|
|
41.14
|
|
|
|
|
|
|
Options outstanding at February 3, 2018
|
3,912,412
|
|
|
$
|
20.33
|
|
|
4.79
|
|
$
|
3,930
|
|
Exercisable at February 3, 2018
|
2,232,456
|
|
|
$
|
24.56
|
|
|
6.52
|
|
$
|
668
|
|
Options exercisable and expected to vest at February 3, 2018
|
3,912,412
|
|
|
$
|
20.33
|
|
|
4.79
|
|
$
|
3,930
|
|
The fair value of each stock option was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants during fiscal
2018
, fiscal
2017
and fiscal
2016
:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
Valuation Assumptions
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Risk-free interest rate
|
1.5
|
%
|
|
1.0
|
%
|
|
1.0
|
%
|
Expected stock price volatility
|
37.1
|
%
|
|
35.4
|
%
|
|
36.7
|
%
|
Expected dividend yield
|
8.0
|
%
|
|
4.8
|
%
|
|
4.7
|
%
|
Expected life of stock options (in years)
|
4.4
|
|
|
4.2
|
|
|
3.8
|
|
The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant.
The expected stock price volatility is determined based on an average of both historical volatility and implied volatility. Implied volatility is derived from exchange traded options on the Company’s common stock.
The expected dividend yield is based on the Company’s history and expectations of dividend payouts.
The expected life is determined based on historical trends.
The weighted average grant date fair value of options granted was
$1.57
,
$3.53
and
$3.75
during fiscal
2018
, fiscal
2017
and fiscal
2016
, respectively. The total intrinsic value of stock options exercised was
$0.7 million
during fiscal
2018
and minimal during fiscal 2017. During fiscal
2016
, the total intrinsic value of stock options exercised was
$0.1 million
. The intrinsic value of stock options is defined as the difference between the Company’s stock price on the exercise date and the grant date exercise price. The total cash received from option exercises was
$1.4 million
,
$0.2 million
and
$0.3 million
during fiscal
2018
, fiscal
2017
and fiscal
2016
, respectively.
The compensation expense included in SG&A expense recognized was
$2.3 million
before the recognized income tax benefit of
$0.8 million
during fiscal
2018
. As of
February 3, 2018
, there was approximately
$3.7 million
of unrecognized compensation cost related to nonvested stock options. This cost is expected to be recognized over a weighted average period of
1.5 years
. The excess tax shortfall included in cash flows from operating activities related to stock option activity was minimal for fiscal
2018
.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock awards/units
The following table summarizes the nonvested stock awards/units activity under all of the Company’s stock plans during fiscal
2018
:
|
|
|
|
|
|
|
|
|
Number of
Awards/Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Nonvested at January 28, 2017
|
1,686,204
|
|
|
$
|
18.80
|
|
Granted
|
1,969,619
|
|
|
11.41
|
|
Vested
|
(1,052,796
|
)
|
|
17.52
|
|
Forfeited
|
(138,461
|
)
|
|
14.94
|
|
Nonvested at February 3, 2018
|
2,464,566
|
|
|
$
|
13.66
|
|
The following table summarizes the activity for nonvested performance-based units and nonvested market-based units included in the table above during fiscal
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based Units
|
|
Market-Based Units
|
|
Number of
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Nonvested at January 28, 2017
|
787,849
|
|
|
$
|
19.17
|
|
|
323,825
|
|
|
$
|
16.63
|
|
Granted
|
818,416
|
|
|
11.17
|
|
|
309,118
|
|
|
12.03
|
|
Vested
|
(290,645
|
)
|
|
19.85
|
|
|
(244,466
|
)
|
|
17.72
|
|
Forfeited
|
(14,699
|
)
|
|
16.60
|
|
|
—
|
|
|
—
|
|
Nonvested at February 3, 2018
|
1,300,921
|
|
|
$
|
14.01
|
|
|
388,477
|
|
|
$
|
12.28
|
|
The fair value of each market-based nonvested stock unit was estimated on the grant date using the Monte Carlo simulation with the following assumptions used for the grants during fiscal
2018
, fiscal
2017
and fiscal
2016
:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
Valuation Assumptions
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Risk-free interest rate
|
1.4
|
%
|
|
0.9
|
%
|
|
0.9
|
%
|
Expected stock price volatility
|
39.7
|
%
|
|
36.2
|
%
|
|
38.6
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected life of market-based awards (in years)
|
2.8
|
|
|
2.8
|
|
|
2.8
|
|
The weighted average grant date fair value for the total nonvested stock awards/units granted was
$11.41
,
$18.01
and
$18.79
during fiscal
2018
, fiscal
2017
and fiscal
2016
, respectively. The total fair value at grant date of previously nonvested stock awards/units that were vested during fiscal
2018
, fiscal
2017
and fiscal
2016
was
$18.4 million
,
$14.7 million
and
$14.0 million
, respectively. During fiscal
2018
, fiscal
2017
and fiscal
2016
, the total intrinsic value of nonvested stock awards/units that vested was
$12.6 million
,
$9.4 million
and
$11.0 million
, respectively. The total intrinsic value of nonvested stock awards/units outstanding and unvested as of
February 3, 2018
was
$36.0 million
.
The compensation expense included in SG&A expense recognized during fiscal
2018
was
$16.3 million
before the recognized income tax benefit of
$5.6 million
. As of
February 3, 2018
, there was approximately
$26.9 million
of total unrecognized compensation cost related to nonvested stock awards/units. This cost is expected to be recognized over a weighted average period of
1.6 years
. The excess tax shortfall of
$1.3 million
related to stock award/unit activity was included in cash flows from operating activities for fiscal
2018
.
ESPP
The Company’s
ESPP
allows
qualified employees
(as defined)
to participate in the purchase of designated shares of the Company’s common stock at a price equal to
85%
of the lower of the closing price at the beginning or
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
end of each quarterly stock purchase period.
The ESPP requires participants to hold any shares purchased under the ESPP for a minimum period of
six
months after purchase. In addition, all Company employees are subject to the terms of the Company’s securities trading policy which generally prohibits the purchase or sale of any Company securities during the
two
weeks before the end of each fiscal quarter through
two
days after the public announcement by the Company of its earnings for that period.
The Company has
4,000,000
shares of common stock registered under the ESPP.
The Company’s ESPP will remain in effect through March 11, 2022
.
During fiscal
2018
, fiscal
2017
and fiscal
2016
,
54,300
shares,
44,486
shares and
40,846
shares of the Company’s common stock were issued pursuant to the ESPP at an average price of
$10.45
,
$12.56
and
$16.17
per share, respectively.
The fair value of stock compensation expense associated with the Company’s ESPP was estimated on the date of grant using the Black-Scholes option-pricing valuation model with the following weighted average assumptions used for grants during fiscal
2018
, fiscal
2017
and fiscal
2016
.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
Valuation Assumptions
|
Feb 3, 2018
|
|
Jan 28, 2017
|
|
Jan 30, 2016
|
Risk-free interest rate
|
1.0
|
%
|
|
0.3
|
%
|
|
0.1
|
%
|
Expected stock price volatility
|
45.8
|
%
|
|
41.1
|
%
|
|
34.9
|
%
|
Expected dividend yield
|
7.6
|
%
|
|
6.2
|
%
|
|
4.7
|
%
|
Expected life of ESPP options (in months)
|
3
|
|
|
3
|
|
|
3
|
|
The weighted average grant date fair value of ESPP options granted during fiscal
2018
, fiscal
2017
and fiscal
2016
was
$2.85
,
$3.32
and
$4.06
, respectively.
(
20
) Fair Value Measurements
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e. interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
February 3, 2018
and
January 28, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Feb 3, 2018
|
|
Fair Value Measurements at Jan 28, 2017
|
Recurring Fair Value Measures
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
—
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
9,868
|
|
|
$
|
—
|
|
|
$
|
9,868
|
|
Interest rate swap
|
|
—
|
|
|
1,460
|
|
|
—
|
|
|
1,460
|
|
|
—
|
|
|
876
|
|
|
—
|
|
|
$
|
876
|
|
Total
|
|
$
|
—
|
|
|
$
|
1,511
|
|
|
$
|
—
|
|
|
$
|
1,511
|
|
|
$
|
—
|
|
|
$
|
10,744
|
|
|
$
|
—
|
|
|
$
|
10,744
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
—
|
|
|
$
|
18,089
|
|
|
$
|
—
|
|
|
$
|
18,089
|
|
|
$
|
—
|
|
|
$
|
1,424
|
|
|
$
|
—
|
|
|
$
|
1,424
|
|
Deferred compensation obligations
|
|
—
|
|
|
13,476
|
|
|
—
|
|
|
13,476
|
|
|
—
|
|
|
11,184
|
|
|
—
|
|
|
11,184
|
|
Total
|
|
$
|
—
|
|
|
$
|
31,565
|
|
|
$
|
—
|
|
|
$
|
31,565
|
|
|
$
|
—
|
|
|
$
|
12,608
|
|
|
$
|
—
|
|
|
$
|
12,608
|
|
There were
no
transfers of financial instruments between the three levels of fair value hierarchy during fiscal
2018
and fiscal
2017
.
Foreign exchange currency contracts are entered into by the Company principally to hedge the future payment of inventory and intercompany transactions by non-U.S. subsidiaries.
Periodically, the Company may
also
use foreign exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries
. The fair values of the Company’s foreign exchange currency contracts are based on quoted foreign exchange forward rates at the reporting date. The fair values of the interest rate swaps are based upon inputs corroborated by observable market data. Deferred compensation obligations to employees are adjusted based on changes in the fair value of the underlying employee-directed investments. Fair value of these obligations is based upon inputs corroborated by observable market data.
During fiscal 2018, the Company invested €
0.5 million
(
$0.5 million
) in a private equity fund, which was included in other assets in the Company’s consolidated balance sheet as of
February 3, 2018
. As permitted in accordance with authoritative guidance, the Company uses net asset value per share as a practical expedient to measure the fair value of this investment and has not included this investment in the fair value hierarchy as disclosed above. As of
February 3, 2018
, the Company had an unfunded commitment to invest an additional €
4.5 million
($
5.7 million
) in the private equity fund.
The carrying amount of the Company’s remaining financial instruments, which principally include cash and cash equivalents, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments. The fair values of the Company’s debt instruments (see Note 8)
are based on the amount of future cash flows associated with each instrument discounted using the Company’s incremental borrowing rate.
As of
February 3, 2018
and
January 28, 2017
,
the carrying value of all financial instruments was not materially different from fair value
, as the interest rates on the Company’s debt approximated rates currently available to the Company.
(21) 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 and Mexico are denominated in U.S. dollars, British pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
.
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 to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts.
Refer to Note 8 for further information.
The impact of the credit risk of the counterparties to the derivative contracts is considered in determining the fair value of the foreign exchange currency contracts and interest rate swap agreements. As of
February 3, 2018
, credit risk has not had a significant effect on the fair value of the Company’s foreign exchange currency contracts and interest rate swap agreements.
Hedge Accounting Policy
Foreign Exchange Currency Contracts
U.S. dollar forward contracts are used to hedge forecasted merchandise purchases over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges,
are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold.
The Company also hedges forecasted intercompany royalties over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges,
are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in other income and expense in the period in which the royalty expense is incurred.
The Company has also used U.S. dollar forward contracts to hedge the net investments of certain of the Company’s international subsidiaries over specific months.
Changes in the fair value of these U.S. dollar forward contracts, designated as net investment hedges,
are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in earnings (loss) until the sale or liquidation of the hedged net investment
.
The Company also has
foreign exchange currency
contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of
foreign exchange currency
contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense.
Interest Rate Swap Agreements
Interest rate swap agreements are used to hedge the variability of the cash flows in interest payments associated with the Company’s floating-rate debt. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are
recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
Periodically, the Company may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary of Derivative Instruments
The fair value of derivative instruments in the consolidated balance sheets as of
February 3, 2018
and
January 28, 2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Balance Sheet
Location
|
|
Fair Value at Feb 3, 2018
|
|
Fair Value at Jan 28, 2017
|
ASSETS:
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Other current assets/
Other assets
|
|
$
|
41
|
|
|
$
|
6,072
|
|
Interest rate swap
|
|
Other assets
|
|
1,460
|
|
|
876
|
|
Total derivatives designated as hedging instruments
|
|
|
|
1,501
|
|
|
6,948
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Other current assets/
Other assets
|
|
10
|
|
|
3,796
|
|
Total
|
|
|
|
$
|
1,511
|
|
|
$
|
10,744
|
|
LIABILITIES:
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Accrued expenses/
Other long-term liabilities
|
|
$
|
13,789
|
|
|
$
|
1,250
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Accrued expenses
|
|
4,300
|
|
|
174
|
|
Total
|
|
|
|
$
|
18,089
|
|
|
$
|
1,424
|
|
Derivatives Designated as Hedging Instruments
Foreign Exchange Currency Contracts Designated as
Cash Flow Hedges
During fiscal
2018
, the Company purchased U.S. dollar forward contracts in Europe and Canada totaling US
$147.6 million
and US
$25.7 million
, respectively, that were designated as cash flow hedges.
As of
February 3, 2018
, the Company had forward contracts outstanding for its European and Canadian operations of US
$145.8 million
and US
$38.7 million
, respectively, to hedge forecasted merchandise purchases and intercompany royalties, which are expected to mature over the next
17 months
.
At
January 28, 2017
, the Company had forward contracts outstanding for its European and Canadian operations of US
$104.2 million
and US
$66.9 million
, respectively, that were designated as cash flow hedges.
As of
February 3, 2018
, accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a net unrealized
loss
of approximately
$15.5 million
, net of tax, of which
$10.0 million
will be recognized in cost of product sales or other
expense
over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current year-end values
.
Interest Rate Swap Agreement Designated as Cash Flow Hedge
During fiscal 2017, the Company entered into an interest rate swap agreement with a notional amount of
$21.5 million
, designated as a cash flow hedge, to hedge the variability of cash flows in interest payments associated with the Company’s floating-rate debt. This interest rate swap agreement matures in
January 2026
and converts the nature of the Company’s real estate secured term loan from LIBOR floating-rate debt to fixed-rate debt, resulting in a swap fixed rate of approximately
3.06%
.
As of
February 3, 2018
, accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized
gain
of approximately
$1.1 million
, net of tax, which will be recognized in interest expense after the following 12 months, at the then current values on a pre-tax basis, which can be different than the current year-end values.
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the gains (losses) before taxes recognized on the derivative instruments designated as cash flow hedges in accumulated other comprehensive income (loss) and net earnings (loss) for fiscal
2018
, fiscal
2017
and fiscal
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
Recognized in
OCI
|
|
Location of Gain (Loss)
Reclassified from
Accumulated OCI
into Loss (1)
|
|
Gain (Loss)
Reclassified from
Accumulated OCI into Loss
|
|
Loss Reclassified from Accumulated OCI to Retained Earnings (2)
|
|
Year Ended Feb 3, 2018
|
|
|
Year Ended Feb 3, 2018
|
|
Year Ended Feb 3, 2018
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
$
|
(22,497
|
)
|
|
Cost of product sales
|
|
$
|
14
|
|
|
$
|
—
|
|
Foreign exchange currency contracts
|
$
|
(1,163
|
)
|
|
Other income/expense
|
|
$
|
(583
|
)
|
|
$
|
—
|
|
Interest rate swap
|
$
|
272
|
|
|
Interest expense
|
|
$
|
(87
|
)
|
|
$
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
Recognized in
OCI
|
|
Location of Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings (1)
|
|
Gain (Loss)
Reclassified from
Accumulated OCI into Earnings
|
|
Year Ended Jan 28, 2017
|
|
|
Year Ended Jan 28, 2017
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
Foreign exchange currency contracts
|
$
|
—
|
|
|
Cost of product sales
|
|
$
|
3,518
|
|
Foreign exchange currency contracts
|
$
|
227
|
|
|
Other income/expense
|
|
$
|
301
|
|
Interest rate swap
|
$
|
660
|
|
|
Interest expense
|
|
$
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
Recognized in
OCI
|
|
Location of Gain
Reclassified from
Accumulated OCI
into Earnings (1)
|
|
Gain Reclassified from
Accumulated OCI into Earnings
|
|
Year Ended Jan 30, 2016
|
|
|
Year Ended Jan 30, 2016
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
Foreign exchange currency contracts
|
$
|
9,301
|
|
|
Cost of product sales
|
|
$
|
8,314
|
|
Foreign exchange currency contracts
|
$
|
500
|
|
|
Other income/expense
|
|
$
|
833
|
|
________________________________________________________________________
|
|
(1)
|
The Company recognized gains of $
2.7 million
, $
0.9 million
and $
0.1 million
resulting from the ineffective portion related to foreign exchange currency contracts in interest income during fiscal
2018
, fiscal
2017
and fiscal
2016
, respectively. There was
no
ineffectiveness recognized related to the interest rate swap during fiscal
2018
and fiscal
2017
.
|
|
|
(2)
|
During the fourth quarter of fiscal 2018, the Company early adopted authoritative guidance which addresses
certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the
Tax Reform
enacted in December 2017
.
As a result, the Company recorded a cumulative adjustment to reduce retained earnings by
$0.2 million
with a corresponding increase to accumulated other comprehensive income (loss) related to the Company’s interest rate swap designated as a cash flow hedge
.
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes net after-tax derivative activity recorded in accumulated other comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended Feb 3, 2018
|
|
Year Ended Jan 28, 2017
|
Beginning balance gain
|
$
|
5,400
|
|
|
$
|
7,252
|
|
Net gains (losses) from changes in cash flow hedges
|
(20,408
|
)
|
|
1,059
|
|
Net (gains) losses reclassified to earnings (loss)
|
414
|
|
|
(2,911
|
)
|
Net losses reclassified to retained earnings (1)
|
225
|
|
|
—
|
|
Ending balance gain (loss)
|
$
|
(14,369
|
)
|
|
$
|
5,400
|
|
________________________________________________________________________
|
|
(1)
|
During the fourth quarter of fiscal 2018, the Company early adopted authoritative guidance which addresses
certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the
Tax Reform
enacted in December 2017
.
As a result, the Company recorded a cumulative adjustment to reduce retained earnings by
$0.2 million
with a corresponding increase to accumulated other comprehensive income (loss) related to the Company’s interest rate swap designated as a cash flow hedge
.
|
Derivatives Not Designated as Hedging Instruments
As of
February 3, 2018
, the Company had euro foreign exchange currency contracts to purchase US
$68.2 million
expected to mature over the next
12 months
and Canadian dollar foreign exchange currency contracts to purchase US
$17.6 million
expected to mature over the next
11 months
.
At
January 28, 2017
, the Company had euro foreign exchange currency contracts to purchase US
$81.4 million
and Canadian dollar foreign exchange currency contracts to purchase US
$13.9 million
.
The following table summarizes the gains (losses) before taxes recognized on the derivative instruments not designated as hedging instruments in other income and expense for fiscal
2018
, fiscal
2017
and fiscal
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss)
Recognized in
Earnings (Loss)
|
|
Gain (Loss) Recognized in Earnings (Loss)
|
|
|
|
Year Ended Feb 3, 2018
|
|
Year Ended Jan 28, 2017
|
|
Year Ended Jan 30, 2016
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Other income/expense
|
|
$
|
(10,511
|
)
|
|
$
|
2,427
|
|
|
$
|
4,346
|
|
Interest rate swap
|
|
Other income/expense
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
179
|
|
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(22) 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.
During fiscal
2018
, the Company repurchased
3,866,387
shares under the program at an aggregate cost of
$56.1 million
, of which
$6.0 million
was settled subsequent to year end
. During fiscal
2017
, the Company repurchased
289,968
shares under the program at an aggregate cost of
$3.5 million
. During fiscal
2016
, the Company repurchased
2,000,000
shares at an aggregate cost of
$44.0 million
.
As of
February 3, 2018
, the Company had remaining authority under the program to purchase
$392.2 million
of its common stock
.
(23) Subsequent Events
Share Repurchases
Subsequent to year end, the Company repurchased approximately
1.1 million
shares under its share repurchase program at an aggregate cost of
$17.6 million
.
Dividends
On
March 21, 2018
, the Company announced a regular quarterly cash dividend of
$0.225
per share on the Company’s common stock.
The cash dividend will be paid on
April 20, 2018
to shareholders of record as of the close of business on
April 4, 2018
.