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Text: Comments will also reference certain non-GAAP or adjusted measures.
Before turning the call to Carlos, I would like to mention that we will be participating in a fireside chat at the Virtual Morgan Stanley Global Consumer Conference on Wednesday, December 1 at 9:55 AM Eastern.
We hope to see you there.
I am very pleased to report another strong performance this quarter, which exceeded our expectations for revenue growth, operating margin expansion and bottom line results.
Revenues increased 13% for the quarter versus last year and adjusted operating profit reached $70 million delivering an adjusted operating margin of almost 11% and adjusted earnings per share of $0.62 versus $0.58 last year and $0.22 in the pre-pandemic third quarter.
This performance was driven by the hard work, vision and dedication of our teams around the world, the business transformation that we have executed on the amazing product and strong momentum of the Guess brand.
We are very proud of all of you.
I strongly believe our Company is positioned better than ever to extend its distribution, gain market share and increase profitability.
We have a strong balance sheet and solid cash generation power to support our business growth and return excess cash to our shareholders.
Our Board's commitment is evident with the previously announced plans to our unused $200 million share repurchase authorization.
And today's approval to double our dividend.
We firmly believe our stock is trading below its intrinsic value and plan to execute share repurchases opportunistically.
Over the last two years, we have successfully executed a full transformation of our business and what better prove that our strategy is working, than our results this fiscal year, when we are guiding to double our operating margin and profit from pre-pandemic levels.
The first piece of this transformation is the innovation of our brand, including launching our first global line innovating the quality and sustainability of our product, upgrading our marketing and visual merchandising, optimizing full price selling, remodeling our store fleet and enriching the customer experience.
Paul has led this critical initiative and together with the product and creative teams, they have been doing an incredible job.
The second piece of the transformation is the reset of our business model.
We have optimized our distribution in both retail and wholesale by removing unproductive stores and accounts, reducing our product offering to result in a single business with more productive SKUs from our global line.
We have also remained laser focused on margin expansion with improvements coming from IMU optimization, longer occupancy and cost reductions, including the consolidation of certain functions in Europe.
As a natural extension of these efforts, during the third quarter, we completed an intra entity transfer of certain intellectual property rights from the US to Switzerland, more closely aligning our IP rights with our business operations.
We are operating in a more capital-efficient way turning inventory faster with less non-productive assets.
This transformation has repositioned this Company's ability to deliver strong growth, significant profitability and superior shareholder returns into the future.
Sustainability remains a key focus for our brand and we are committed to being part of the solution to climate change.
We have aggressive internal targets to reduce corporate greenhouse gas emissions by 50% and supply chain emissions by 30% by 2030 and to achieve net zero by 2050.
In fact, last month, we signed an open letter to G20 leaders calling for policies that align with this goal.
We also supported the United Nations Conference of Youth to ensure the collective youth voice on climate negotiations is heard.
We are actively working on our climate action roadmap that includes store efficiency measures, investment in renewables and changes to the way that we create and produce our product, I couldn't be prouder of our leadership in this very important area.
Let me add some color to our third quarter results.
Our retail and wholesale businesses in North America have remarkable performance in the period with significant increases in operating profit and margin expansion.
Our licensing business also reported strong quarter, all driven by the strong momentum our brand is enjoying in the marketplace.
Our Europe segment performed well positively impacted by a shift in business to LLY due to the timing of inventory receipts, and I am proud to say that we closed the spring-summer order book for our European wholesale business this quarter with orders up 12% to LLY.
And our sales campaigns for the pre-fall-winter season is looking promising for double-digit growth as well.
These results clearly signal that we are continuing to gain market share.
Our Asia segment had a challenging quarter and continues to be impacted by the COVID situation on government restrictions in several countries including China, Japan and Taiwan.
I am really encouraged by the momentum that we saw in the third quarter in our top line which of course starts with our brand and our product.
We had strong performance in dresses, sweaters outerwear and denim as well as our high-end Marciano brand.
North America saw a pop in the mid-tops while Europe remained strong in athleisure.
Our men's business outperformed in North America, and in accessories sales of handbags and watches were solid in both regions.
I believe, the strength that we have been seeing in categories like denim, Marciano, handbags, dresses and outerwear bodes well for the future as these provide us key levers to drive same-store sales growth.
Guess is a true lifestyle brand and is poised to capitalize on current consumer trends.
Casualization is here to stay, which will help fuel our continued growth in categories like denim.
We have a diversified denim offering with silhouette including skinny, straight leg, mom jean and mini flare and see this as key opportunity for future growth.
At the same time, we see consumers returning to social activities and fashion-oriented which is seen in other key areas of our business like dresses and Marciano.
Regarding our store fleet, we opened 55 new stores so far this year, most of which were pop-ups with new gas and factory stores, but also specialty conference like accessories, activewear, Marciano, kids and our Gen Z concept Guess Originals.
We continue to believe that we have substantial whitespace for new stores in many of our markets and stores are a key pillar to represent a lifestyle attributes of our brands, provide a tool for new customer acquisition will complete the omnichannel experience.
In connection with the elevation of our brand, we embarked on our remodeling program that will ultimately touch roughly 630 stores.
Including new stores, this would represent 80% of our entire fleet in Europe and North America by the end of next year.
We continue to invest in technology including upgrades to our store infrastructure to drive efficiencies and enhance the customer experience.
Our e-commerce business continues to grow with sales in North America and Europe in the third quarter, up 15% to last year and 37% to LLY.
This is a source of both revenue and profitability growth for our brand and it represents a material go forward opportunity for us.
And we continue to make progress on our customer centricity initiatives including omnichannel capabilities and advanced data analytics and customer segmentation.
In Europe, we are rolling out omnichannel and ship from store capabilities in all countries and we have launched a new gift card application for the holidays.
Regarding customer analytics, we have nearly 6 million contactable customers in our databases in North America and Europe and have added 1 million new customers this year so far.
Over 85% of this customers provide us with their mobile phone number and over 20% with their home address.
So we can leverage SMS marketing and mailers.
As part of the Customer 360 projects, we recently launched our CRM platform, which gives us a 360 view of our customer and enable us to improve the way we segment and personalize our communication marketing and promotional strategies.
This is fully implemented in Europe and early results are very promising.
The same application will be implemented in North America next year.
We'll continue to drive innovation in this area and fund investments in technology and customer analytics.
Regarding inventory and the supply chain, it will come as no surprise that our product development cycle has been impacted by the unprecedented challenges that the world is facing on the supply and logistics side.
Our team is doing an incredible job mitigating this challenges to the extent possible.
Our work to consolidate our vendors going from over 500 to around 135 as well as the execution of the global line which reduce SKUs by over 40% has enabled us to leverage higher volumes to push through production.
We have ordered product in advance to allow for extended lead times and our inventory levels at the end of Q3 reflect this.
We maintain a globally diversified sourcing strategy which has helped us to limit impacts when areas experienced disruptions.
We are also moving roughly 10% of our apparel sourcing to locations that are closer to the final distribution to get out and tighten costs as well as exploring alternative shipping methods like to change to move product faster between China and Europe and we are certainly investing in air transportation when it makes sense to get our product in time to sell.
This year, we have gone through above at 7% usage of air freight versus a prior average of about 3%.
In addition, as with the rest of the industry, we are experiencing increases in raw material cost like cotton.
We have contracts for certain raw materials that cover us into Q3 next year and simultaneously are looking at alternative options like recycled cotton made of post-consumer waste products.
All of this is obviously resulting in elevated costs which we have built into our outlooks.
Importantly, we have been successful in increasing prices with AURs up 15% to 20% alongside our innovation and product quality to mitigate the impact this cost increases are having on our profitability.
As of the end of Q3, we had over a $100 million of inventory in transit representing almost 25% of our total ownership compared to 12% in pre-pandemic Q3.
A lot of this product will support our post holiday business primarily to service our European wholesale business and our on-hand inventory today is completely aligned with our demand expectations for the upcoming holiday season.
I feel strongly about our plans for the holiday business.
We have a lot of newness coming to stores.
Our assortment and the elevated quality of our product is clearly resonating with our customers as evidenced by our strong start to the fourth quarter.
In North America, traffic is gaining momentum recently and we are experiencing good conversion and strong AURs.
Recent improvement in trends in our tourist location suggests that we are getting a boost from the change in travel restrictions implemented in the US earlier this month.
In Europe, we have also seen positive sequential momentum in sales comps at the start of the quarter driven by material increases in traffic as AUR also remain strong.
As we have done all year, we plan to continue to be less promotional than in the past, especially with store wide level discounts.
We are increasing marketing to fuel the customer acquisition.
We are expanding the use of direct mail and catalog pieces planning to send out 1.2 million pieces during the quarter as well as increasing our investment in digital marketing to drive traffic to our sites.
We have bought key product feature in our marketing campaigns in significant debt.
We have also added video capabilities to show product attributes more effectively.
When you put it altogether, we see top line growing in excess of 20% in the fourth quarter period versus last year and operating profit exceeding $100 million.
This represents an increase in both the top and bottom line to our previous outlook for the year and Katie will give us more color on this in a few minutes.
Looking past this year, we remain confident in our longer-term goals to reach revenue of $2.8 billion and operating margins of 12% in fiscal year 2024.
In closing, let me just say that I could not be prouder of what our team has accomplished in the last 2.5 years since I've been back.
We have highly dedicated people who share an incredible passion to pursue our purpose.
And on this team when we commit to something we deliver.
We committed to elevating our brand we are delivered.
I think Paul and our product teams have done extraordinary work with this and today, we have one line of product for the entire world across all categories and our products are the best they have been in our Company's history, highly elevated, of great quality and very consistent with the DNA of the Guess brand.
We committed to transforming the business we are delivering.
We have reacted to every aspect of our business model including our store portfolio, digital business, sourcing and logistics operations and systems infrastructure.
We also committed to expanding our margins and we are delivering here too.
We now expect to reach an 11% operating margin this year, double our margin of two years ago and well ahead of our initial plans.
While these are all significant accomplishments, I strongly believe that the best is yet to come for us.
We are in an inflection point at Guess, and I'm very confident that our business is well positioned to generate superior returns in the future and our results will be here to prove it.
You have our commitment.
With that, let me pass it to Katie to review our financials in more detail.
I'm excited to tell you more about our financial performance this quarter which truly exceeded our expectations.
We tripled earnings to pre-pandemic levels and are raising both our top and bottom line outlook for the year.
The brand is showing strong momentum going into the holiday season and despite the challenging supply chain we have the products to support that demand.
These results are again a testament of our organization's commitment to win, flexibility to adapt during volatile times and pure grit.
I love being part of this passionate team.
Now, let me take you through the details on the quarter.
Third quarter revenues were $643 million, up 13% to last year and up 4% compared to LLY.
This exceeded our expectations as our Americas Retail, European wholesale and licensing businesses all outperformed.
Overall, the 4% revenue increased to pre-pandemic LLY with the result of growth in our European business driven by wholesale including shift to sales from Q2 to Q3 as well as e-commerce.
This was partially offset by permanently closed stores and negative same-store sales in Europe and Asia.
Excluding sales from the over 170 stores that we have closed since the pandemic, Q3 revenue would have been up 9% to LLY.
And let me just remind you that these stores are accretive to operating profit by about $20 million on a run rate basis.
Let's talk a bit about sales performance by segment.
In Americas Retail, revenues were up 30% versus last year and down 5% versus LLY, better than our expectations.
Again this quarter, the declines for LLY was driven entirely by permanent store closures which are worth roughly 7% of sales.
So we're constantly US and Canada were up 2% in constant currency versus LLY.
Same-store sales in the US remain positive despite continued negative traffic trends with positive conversion and AUR growth over 20%.
I'm happy to report that sales in our over 70 stores in Canada have improved substantially driven by a material increase in traffic in that region as the pandemic there is beginning to wane.
This quarter, we continue to be a lot less promotional lapping also four events on holidays like Labor Day that we didn't do this year, which has an impact on our topline, but of course a benefit to our bottom line.
I can help to point out the increase in profitability that we have brought to this segment that is allowing us to capitalize on our positive sales trends.
Operating margin in Q3 was over 14% versus less than 1% in the prior two years and operating profit is 15 times what it was in pre-pandemic LLY even on lower sales, what an incredible business transformation.
In Europe, revenues were up 3% versus last year and 19% versus LLY.
The increase to LLY is primarily a result of growth in our wholesale business.
As you may recall from last quarter, our shipments for the fall-winter season were a few weeks away due to challenges with the supply chain.
So we had a shift in sales from Q2 into Q3.
But even absent the shift, this business had positive momentum and we are gaining market share here.
While our retail business continues to be pressured by pandemic-related traffic declines, we saw a significant sequential improvement in our sales since last quarter.
Store comps for Europe were down 13% in constant currency versus LLY, a 7% improvement from down 20% last quarter as a result of improved traffic and continued increases in AURs.
In Asia, revenue was down 8% in the last year and 31% to LLY, nearly half of this decline was driven by the permanent store closures.
Our store comps were down 25% in constant currency versus LLY, 5% better than Q2 with negative sales comps in South Korea and China more moderate than other areas in the region.
This region has struggled with the resurgence of COVID-19 as well as the lack of consumer confidence which is deeply impacting our sales.
Our Americas wholesale sales were up 64% to last year and 5% to LLY driven by higher sales in the US and licensing revenue continues to outperform, up 37% to last year and 20% to LLY in Q3 driven by strong performance in shoes, perfumes and watches.
Total company gross margin for the quarter was 45.7% more than 800 basis points higher than two years ago.
Our product margin increased 340 basis points this quarter versus LLY primarily as a result of lower promotions and higher IMU, partially offset by business mix and increased freight, which was worth about 100 basis points this quarter.
Occupancy rates increased 500 basis points driven by business mix, lower rents and permanently closed stores.
Adjusted SG&A for the quarter was $223 million compared to $206 million two years ago.
The increase is the result of variable costs for both the e-commerce and wholesale businesses, mostly in Europe which grew materially into LLY as well as higher performance based compensation.
Adjusted operating profit for the third quarter was $70 million versus $55 million last year and $23 million two years ago.
This is a 27% increase to last year and an over 200% increase to pre-pandemic levels.
Our balance sheet remains strong.
We ended the third quarter with $391 million in cash, $26 million higher than last year's sales at the end of Q3.
Our cash balance was impacted by an $80 million US tax payments made in connection with the IP transfer that Carlos mentioned.
We expect to receive this amount in Switzerland over the next 5 to 10 years.
Inventories were $482 million, up 23% in US dollars and 22% in constant currency versus last year and down 8% in constant currency to LLY.
This increase reflects our strategy to secure good in advance of the holidays and Q1 in light of the global supply chain disruptions and elongated transit times.
Year-to-date capital expenditures were $41 million up from $12 million in the prior year, but below pre-pandemic levels, mainly driven by investments in new stores, remodels and technology.
Free cash flow for the first three quarters of the year was negative $41 million driven down by the $80 million US tax payments that I previously mentioned.
Excluding the tax payments, our free cash flow would have been positive $39 million.
Let me touch on capital allocation.
We are confident in our ability to generate sustainable and profitable growth and ample free cash flow.
As a result, we have the runway not only to fund our growth initiatives, but also return incremental capital to our shareholders.
As you recall, last quarter we expanded our share repurchase program to $200 million.
Today, we announced that our Board of Directors has approved a 100% increase in our quarterly dividend from $0.1125 to $0.225.
As a reminder, our dividend was announced earlier [Phonetic] before we executed the $300 million convertible notes to fund share repurchases in April of 2019.
Now let's talk about our go-forward expectations.
We are raising our outlook for the fourth quarter and the full fiscal year.
For the fourth quarter, we are expecting revenue to be down mid-single digits versus LLY driven by timing in our wholesale business and permanently closed stores partially offset by growth in our e-commerce business.
I wanted to note that in light of the recent developments with the pandemic in Europe, we have built in more prudent assumptions for revenues for a European retail business in the fourth quarter.
In terms of profit, adjusted operating margin for the fourth quarter is expected to be about 100 basis points better than LLY.
Gross margin is expected to expand by around by 500 basis points to LLY driven primarily by business mix, lower occupancy, lower promotions and improved IMU.
And as with the rest of the industry, we are seeing some cost pressures, particularly in freight, which are built into these numbers.
We anticipate that the adjusted SG&A rate will be up around 400 basis points as cost savings are offset by business mix, investments in labor and higher incentive-based compensation.
For the year, we now expect revenue to be down in the low single digits versus LLY and adjusted operating margin to reach just over 11% for the year versus 5.6% in LLY.
This represents a doubling of adjusted operating margin with margin expansion of over 550 basis points to our pre-pandemic business despite a lower revenue base.
To break it down for you, this margin expansion comes from about 250 basis points of lower promotional activity, 200 basis points of IMU improvement, 150 basis points of lower occupancy expense and 200 basis points of channel mix and onetime benefits.
This was partially offset by about 150 basis points of higher inbound freight and 100 basis points of increases in G&A, mostly higher performance-based compensation for this year.
We are very confident in the sustainability of these margin improvements.
We realized that the current environment of significant demand and limitations in product availability have triggered broad increases in margin in our industry.
In our case, most of our margin improvement has come from concrete changes in our business model that Carlos walked you through earlier and are not circumstantial but more permanent in nature.
This margin expansion combined with the potential for future top line growth at Guess is very powerful.
For these reasons, we remain confident in our longer term goals, and we look forward to sharing our outlook for the next fiscal year with you when we report Q4.

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q3 adjusted earnings per share $0.62.
q3 revenue $643 million.

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