GUESS?, INC. General
Unless the context indicates otherwise, when we refer to "we," "us," "our" or the "Company" in this Form 10K, we are referring to Guess?, Inc. and its subsidiaries on a consolidated basis.
COVID-19 Business Update
The COVID-19 pandemic is continuing to negatively impact our businesses. In late fiscal 2021, we incurred a new round of government-mandated temporary store closures, mostly inEurope . The number of temporary store closures ebbed and flowed during the first quarter of fiscal 2022 based on local conditions. During the second quarter of fiscal 2022, we gradually opened our stores that were closed at the end of the first quarter of fiscal 2022 due to COVID-19 restrictions. As ofJanuary 29, 2022 , 100% of our stores were open. As ofMarch 21, 2022 , approximately 99% of our directly operated stores were open. 35 --------------------------------------------------------------------------------
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The COVID-19 crisis has also contributed to disruptions in the overall global supply chain, leading to industry-wide product delays and higher product and freight costs. We have been working actively to mitigate these headwinds to the extent possible through a number of global supply chain initiatives. In light of the fluid nature of the pandemic, we continue to carefully monitor global and regional developments, such as the recent spread of the Omicron variant, and respond appropriately. We also continue to strategically manage expenses in order to protect profitability and to mitigate, to the extent possible, the effect of the supply chain disruptions.
Business Segments
Our businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail, Americas Wholesale,Europe ,Asia and Licensing. Our Americas Retail, Americas Wholesale,Europe and Licensing reportable segments are the same as their respective operating segments. Certain components of ourAsia operating segment are separate operating segments based on region, which have been aggregated into theAsia reportable segment for disclosure purposes. We evaluate segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, asset impairment charges, net gains (losses) from lease modifications, restructuring charges and certain non-recurring credits (charges), if any. The Americas Retail segment includes our retail and e-commerce operations in theAmericas . The Americas Wholesale segment includes our wholesale operations in theAmericas . TheEurope segment includes our retail, e-commerce and wholesale operations inEurope and theMiddle East . TheAsia segment includes our retail, e-commerce and wholesale operations inAsia and the Pacific. The Licensing segment includes the worldwide licensing operations. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, asset impairment charges, net gains (losses) on lease modifications, restructuring charges and certain non-recurring credits (charges), if any. Corporate overhead costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, corporate performance-based compensation, facilities, global advertising and marketing, human resources, information technology and legal. Information regarding these segments is summarized in "Part IV. Financial Statements - Note 18 - Segment Information" in this Form 10-K.
Products
We derive our net revenue from the sale of GUESS?, G by GUESS (GbG), GUESS Kids and MARCIANO apparel and our licensees' products through our worldwide network of directly-operated and licensed retail stores, wholesale customers and distributors, as well as our online sites. We also derive royalty revenue from worldwide licensing activities. During fiscal 2021, we made the decision to integrate our G by GUESS brand into our Factory business over time in order to drive further efficiencies. Foreign Currency Volatility Since the majority of our international operations are conducted in currencies other than theU.S. dollar (primarily the British pound, Canadian dollar, Chinese yuan, euro, Japanese yen, Korean won, Mexican peso, Polish zloty, Russian rouble and Turkish lira), currency fluctuations can have a significant impact on the translation of our international revenues and earnings (loss) intoU.S. dollars. Some of our transactions that occur primarily inEurope ,Canada ,South Korea ,China ,Hong Kong andMexico are denominated inU.S. dollars, Swiss francs, British pounds and Russian roubles, exposing them to exchange rate fluctuations when these transactions (such as inventory purchases or periodic lease payments) are converted to their functional currencies. As a result, fluctuations in exchange rates can impact the operating margins of our foreign operations and reported earnings (loss), and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates. When these foreign exchange rates weaken versus theU.S. dollar at the time the respectiveU.S. dollar denominated payment is made relative to the payments made in the comparable period, our product margins could be unfavorably impacted. 36 --------------------------------------------------------------------------------
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In addition, there are certain real estate leases which are denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). As a result, we may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end. During fiscal 2022, the averageU.S. dollar rate was stronger against the Turkish lira, Russian rouble, and Japanese yen and weaker against the British pound, Canadian dollar, euro, Chinese yuan, Mexican peso, Polish zloty and Korean won compared to the average rate in fiscal 2021. This had an overall unfavorable impact on the translation of our international revenues and earnings from operations during fiscal 2022 compared to the prior year. If theU.S. dollar strengthens relative to the respective fiscal 2022 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results, as well as our international cash and other balance sheet items during fiscal 2023, particularly inCanada ,Europe (primarily the euro, British pound, Turkish lira and Russian rouble) andMexico . Alternatively, if theU.S. dollar weakens relative to the respective fiscal 2022 foreign exchange rates, our revenues and operating results, as well as our other cash balance sheet items, could be positively impacted by foreign currency fluctuations during fiscal 2023, particularly in these regions. We currently operate inRussia through our wholesale, retail and e-commerce channels and have 70% ownership of a joint venture. We do not have contracts or other relationships with Russian banks, and Russian sales in our wholesale channel are primarily conducted either in cash in advance, with a bank guarantee or with insurance coverage. Slightly less than 3% of our revenues for fiscal 2022 were generated from sales in these regions. The imposition of enhanced export controls and economic sanctions on transactions withRussia and Russian entities could prevent us from performing existing contracts. For further discussion on currency-related risk, refer to our risk factors under "Part I, Item 1A. Risk Factors." We enter into derivative financial instruments to offset some but not all of the exchange risk on foreign currency transactions. For additional discussion regarding our exposure to foreign currency risk, forward contracts designated as hedging instruments and forward contracts not designated as hedging instruments, refer to "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
Strategy
InDecember 2019 and updated inMarch 2021 ,Carlos Alberini , our Chief Executive Officer, shared his strategic vision and implementation plan for execution which included the identification of several key priorities to drive revenue and operating profit growth. These priorities are: (i) brand relevancy and brand elevation; (ii) product excellence; (iii) customer centricity; (iv) global footprint; and (v) functional capabilities; each as further described below: Brand Relevancy and Brand Elevation. We plan to optimize our brand architecture to be relevant with our three target consumer groups: Heritage, Millennials, and Generation Z. We also plan to elevate our brand and improve the quality of our products, allowing us to realize more full-priced sales and rely less on promotional activity. We will continue to use unique go-to-market strategies and execute celebrity and influencer partnerships and collaborations as we believe that they are critical to engage more effectively with a younger and broader audience.
Product Excellence. We believe product is a key factor of success in our business. We strive to design and make great products and will extend our product offering to provide our customers with products for the different occasions of their lifestyles. We will seek to better address local product needs.
Customer Centricity. We intend to place the customer at the center of everything we do. We plan to implement processes and platforms to provide our customers with a seamless omni-channel experience and expand our digital business.
Global Footprint. We will continue to expand the reach of our brands by optimizing the productivity and profitability of our current footprint and expanding our distribution channels.
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Functional Capabilities. We expect to drive operational improvements to leverage and support our global business more effectively, primarily in the areas of logistics, sourcing, product development and production, inventory management, and overall infrastructure. Capital Allocation We plan to continue to prioritize capital allocation toward investments that support growth and infrastructure, while remaining highly disciplined in the way we allocate capital across projects, including new store development, store remodels, technology and logistics investments and others. When we prioritize investments, we will focus on their strategic significance and their return on invested capital expectations. We also plan to manage product buys and inventory ownership rigorously and optimize overall working capital management consistently. In addition, we plan to continue to return value to shareholders through dividends and opportunistic share repurchases. OnNovember 23, 2021 , we announced an increase to our regular quarterly cash dividend from$0.1125 to$0.225 per share on our common stock. We also repurchased shares of our common stock in open market and privately negotiated transactions totaling$51.0 million and$38.8 million during fiscal 2022 and 2021, respectively. OnMarch 14, 2022 , the Board of Directors expanded its repurchase authorization by$100 million , leaving a new capacity of$249.0 million . In connection with this expanded authorization, we entered into the 2022 ASR Contract with a financial institution under which it will repurchase$175.0 million of its common stock.
Comparable Store Sales
Except as described below in connection with the COVID-19 pandemic, we reportNational Retail Federation calendar comparable store sales on a quarterly basis for our retail businesses which include the combined results from our brick-and-mortar retail stores and our e-commerce sites. We also separately report the impact of e-commerce sales on our comparable store sales metric. As a result of our omni-channel strategy, our e-commerce business has become strongly intertwined with our brick-and-mortar retail store business. Therefore, we believe that the inclusion of e-commerce sales in our comparable store sales metric provides a more meaningful representation of our retail results. Sales from our brick-and-mortar retail stores include purchases that are initiated, paid for and fulfilled at our retail stores and directly operated concessions as well as merchandise that is reserved online but paid for and picked-up at our retail stores. Sales from our e-commerce sites include purchases that are initiated and paid for online and shipped from either our distribution centers or our retail stores as well as purchases that are initiated in a retail store, but due to inventory availability at the retail store, are ordered and paid for online and shipped from our distribution centers or picked-up from a different retail store. Store sales are considered comparable after the store has been open for 13 full fiscal months. If a store remodel results in a square footage change of more than 15%, or involves a relocation or a change in store concept, the store sales are removed from the comparable store base until the store has been opened at its new size, in its new location or under its new concept for 13 full fiscal months. Stores that are permanently closed or temporarily closed (including as a result of pandemic-related closures) for more than seven days in any fiscal month are excluded from the calculation in the fiscal month that they are closed. E-commerce sales are considered comparable after the online site has been operational in a country for 13 full fiscal months and exclude any related revenue from shipping fees. These criteria are consistent with the metric used by management for internal reporting and analysis to measure performance of the store or online sites. Definitions and calculations of comparable store sales used by us may differ from similarly titled measures reported by other companies. As a result of significant and varying temporary store closures and other various restrictions during the COVID-19 pandemic, we have not disclosed any comparable store sales measures when discussing the results of operations for fiscal 2022 compared to fiscal 2021. We believe that comparable store sales measures between these fiscal years are not meaningful to the evaluation of our results due to such COVID-19 restrictions. 38 --------------------------------------------------------------------------------
Table of Contents Executive Summary Overview Given the significant impacts to our business that began in fiscal 2021 as a result of the COVID-19 pandemic, this Executive Summary includes highlights of our performance for fiscal 2022 compared to both (a) fiscal 2020 (the pre-COVID period from two years prior) and (b) fiscal 2021 (the COVID-impacted period from one year ago). Management believes the additional comparison to the two-year ago period is helpful to provide additional context to the current year results. Net earnings attributable to Guess?, Inc. increased 78.5% to$171.4 million , or diluted earnings per share ("EPS") of$2.57 , for fiscal 2022 compared to$96.0 million , or diluted EPS of$1.33 for fiscal 2020. Net earnings attributable to Guess?, Inc. was$171.4 million for fiscal 2022, compared to net loss attributable to Guess?, Inc. of$81.2 million , or diluted loss of$1.27 per common share for fiscal 2021. During fiscal 2022, we recognized$3.1 million of asset impairment charges;$2.7 million net of certain professional service and legal fees and related (credits) costs;$0.3 million net gains on lease modifications;$11.1 million of amortization of debt discount related to our Notes; and$10.6 million in additional income tax expense from certain discrete income tax adjustments related primarily to an intra-entity transfer of intellectual property rights to a wholly-owned Swiss subsidiary (or a combined$23.3 million , or$0.35 per share impact, negative impact after considering the related income tax benefit of$4.0 million of these adjustments). Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. was$194.7 million and adjusted diluted earnings was$2.92 per share for fiscal 2022. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under "Non-GAAP Measures."
Fiscal 2022 Results Compared to Fiscal 2020
For the fiscal year endedJanuary 29, 2022 , we recorded net earnings of$171.4 million , compared to$96.0 million for the fiscal year endedFebruary 1, 2020 . Diluted EPS was$2.57 for the fiscal year endedJanuary 29, 2022 , compared to$1.33 for the fiscal year endedFebruary 1, 2020 . We estimate a net positive impact from our share buybacks and convertible notes transaction of$0.29 and a negative currency impact of$0.36 on diluted EPS for the fiscal year endedJanuary 29, 2022 when compared to the fiscal year endedFebruary 1, 2020 .
Net Revenue. Total net revenue for fiscal 2022 decreased 3.2% to
Earnings from Operations. Earnings from operations for fiscal 2022 were$305.0 million (including$0.3 million net gains on lease modifications,$3.1 million in non-cash impairment charges taken on certain long-lived store related assets and a$7.4 million unfavorable currency translation impact), compared to$140.7 million (including$10.0 million in non-cash impairment charges taken on certain long-lived store related assets) for the fiscal year endedFebruary 1, 2020 . Operating margin for fiscal 2022 increased 6.5% to 11.8%, from 5.3% for the fiscal year endedFebruary 1, 2020 , driven primarily by higher initial markups, lower markdowns, and lower occupancy costs. The negative impact of currency on operating margin for fiscal 2022 was approximately 40 basis points.
Other Expense, Net. Other expense, net for fiscal 2022 was
Fiscal 2022 Results Compared to Fiscal 2021
For the fiscal year endedJanuary 29, 2022 , we recorded net earnings of$171.4 million , compared to net loss of$81.2 million for the fiscal year endedJanuary 30, 2021 . Diluted EPS was$2.57 for the fiscal year endedJanuary 29, 2022 , compared to diluted loss per share of$1.27 for fiscal 2021. We estimate a net positive impact from our share buybacks and our convertible notes transaction of$0.06 and a negative impact from currency of$0.19 on diluted EPS for the fiscal year endedJanuary 29, 2022 when compared to fiscal 2021. 39 --------------------------------------------------------------------------------
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Net Revenue. Total net revenue for fiscal 2022 increased 38.1% to$2.59 billion , from$1.88 billion in fiscal 2021. In constant currency, net revenue increased by 37.0%. Earnings (Loss) from Operations. Earnings from operations for fiscal 2022 were$305.0 million (including$0.3 million net gains on lease modifications,$3.1 million in non-cash impairment charges taken on certain long-lived store related assets and a$4.9 million unfavorable currency translation impact), compared to loss from operations of$60.5 million (including$2.8 million net gains on lease modifications and$80.4 million in non-cash impairment charges taken on certain long-lived store related assets) in fiscal 2021. Operating margin for fiscal 2022 increased 15.0% to 11.8%, from negative 3.2% in fiscal 2021, driven primarily by overall leveraging of expenses, lower non-cash impairment charges and lower markdowns. The positive impact of currency on operating margin for the fiscal year endedJanuary 29, 2022 was approximately 10 basis points.
Other Expense, Net. Other expense, net for fiscal 2022 was
Key Balance Sheet Accounts
•We had
•For the intra-entity transfer of the intellectual property rights, we made
•We had$48.3 million in outstanding borrowings under our term loans as ofJanuary 29, 2022 , compared to$56.8 million as ofJanuary 30, 2021 , and$12.2 million in outstanding borrowings under our credit facilities as ofJanuary 29, 2022 , compared to$7.3 million as ofJanuary 30, 2021 .
•During fiscal 2022, we repurchased 2.3 million shares of our common stock for
•Accounts receivable consists of trade receivables relating primarily to our wholesale business inEurope and, to a lesser extent, to our wholesale businesses in theAmericas andAsia , royalty receivables relating to our licensing operations, credit card and retail concession receivables related to our retail businesses and certain other receivables. Accounts receivable increased by$14.7 million , or 4.7%, to$328.9 million as ofJanuary 29, 2022 , compared to$314.1 million atJanuary 30, 2021 . On a constant currency basis, accounts receivable increased by$40.7 million , or 12.9%. •Inventory increased by$73.2 million , or 18.8%, to$462.3 million as ofJanuary 29, 2022 , from$389.1 million atJanuary 30, 2021 . On a constant currency basis, inventory increased by$99.7 million , or 25.6%. This increase reflects our strategy to secure goods in advance in light of the global supply chain disruptions and elongated transit times.
Global Store Count
In fiscal 2022, together with our partners, we opened 160 new stores worldwide, consisting of 90 stores inEurope and theMiddle East , 60 stores inAsia and the Pacific, nine stores in theU.S. , and one store in Central andSouth America . Together with our partners, we closed 99 stores worldwide, consisting of 43 stores inAsia and the Pacific, 36 stores inEurope and theMiddle East , 15 stores in theU.S. , two stores inCanada and three stores in Central andSouth America . 40
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We ended fiscal 2022 with 1,631 stores and 337 concessions worldwide, comprised
as follows:
Stores Concessions
Directly Directly
Region Total Operated Partner Operated Total Operated Partner Operated
United States 245 245 - 1 - 1
Canada 74 74 - - - -
Central and South America 103 69 34 29 29 -
Total Americas 422 388 34 30 29 1
Europe and the Middle East 779 556 223 50 50 -
Asia and the Pacific 430 124 306 257 99 158
Total 1,631 1,068 563 337 178 159
Of the total 1,631 stores, 1,351 were GUESS? stores, 183 were GUESS? Accessories stores, 59 were G by GUESS (GbG) stores and 38 were MARCIANO stores.
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Results of Operations
Fiscal 2022 Compared to Fiscal 2021
Consolidated Results
The following presents our condensed consolidated statements of income (loss) (in thousands, except per share data):
Fiscal 2022 Fiscal 2021
$ % $ % $ change % change
Net revenue $ 2,591,631 100.0 % $ 1,876,529 100.0 % $ 715,102 38.1 %
Cost of product sales 1,422,126 54.9 % 1,179,427 62.9 % 242,699 20.6 %
Gross profit 1,169,505 45.1 % 697,102 37.1 % 472,403 67.8 %
Selling, general and
administrative expenses 861,578 33.2 % 679,958 36.1 % 181,620 26.7 %
Asset impairment charges 3,149 0.1 % 80,442 4.3 % (77,293) (96.1 %)
Net gains on lease
modifications (259) (0.0 %) (2,801) (0.1 %) 2,542 (90.8 %)
Earnings (loss) from
operations 305,037 11.8 % (60,497) (3.2 %) 365,534 (604.2 %)
Interest expense, net (21,137) (0.8 %) (20,632) (1.1 %) (505) 2.4 %
Other expense, net (30,171) (1.2 %) (5,950) (0.3 %) (24,221) 407.1 %
Earnings (loss) before income
tax expense (benefit) 253,729 9.8 % (87,079) (4.6 %) 340,808 (391.4 %)
Income tax expense (benefit) 73,680 2.9 % (6,338) (0.3 %) 80,018 (1262.5 %)
Net earnings (loss) 180,049 6.9 % (80,741) (4.3 %) 260,790 (323.0 %)
Net earnings attributable to
noncontrolling interests 8,686 0.3 % 488 0.0 % 8,198 1679.9 %
Net earnings (loss)
attributable to Guess?, Inc. $ 171,363 6.6 % $ (81,229) (4.3 %) 252,592 (311.0 %)
Net earnings (loss) per common share attributable to common stockholders:
Basic $ 2.65 $ (1.27) $ 3.92
Diluted $ 2.57 $ (1.27) $ 3.84
Effective income tax rate 29.0 % 7.3 %
Net Revenue. In constant currency, net revenue increased by 37.0%.
Approximately 40% of the increase was driven by higher wholesale shipments, 30%
from temporary store closures in fiscal 2021, and 20% from higher comparable
store revenue. The remaining increase was driven by higher e-commerce, new store
development, and licensing revenues, partially offset by permanent store
closures. Currency translation fluctuations relating to our foreign operations
favorably impacted net revenue by $21.3 million compared to the prior year.
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Gross Margin. Gross margin increased 8.0% for fiscal 2022, compared to fiscal 2021, of which 5.6% was due to lower occupancy rate and 2.3% was due to higher product margin. The favorable decrease in occupancy rate was driven by higher leveraging of expenses by 430 basis points due to higher revenues and the remaining mainly from lower distribution expense. The favorable product margin was driven by 220 basis points in improvement from lower markdowns and 100 basis points in improvement in higher initial markups, offset by 110 basis points in higher freight costs. Gross Profit. Gross profit increased by$472.4 million , or 67.8%, compared to$697.1 million in fiscal 2021. Nearly 90% of the increase in gross profit, which included a favorable impact from currency translation, was driven by an increase in higher net revenue and the remaining increase was driven by lower markdowns and higher initial markups, partially offset by higher freight expense. Currency translation fluctuations relating to our foreign operations favorably impacted gross profit by$3.9 million . We include inbound freight charges, purchasing costs and related overhead, retail store occupancy costs, including lease costs and depreciation and amortization, and a portion of our distribution costs related to our retail business in cost of product sales. We also include net royalties received on our inventory purchases of licensed product as a reduction to cost of product sales. Our gross margin may not be comparable to that of other entities since some entities include all of the costs related to their distribution in cost of product sales and others, like us, generally exclude wholesale-related distribution costs from gross margin, including them instead in selling, general and administrative ("SG&A") expenses. Additionally, some entities include retail store occupancy costs in SG&A expenses and others, like us, include retail store occupancy costs in cost of product sales.
SG&A Rate. Our SG&A rate decreased 2.9% for fiscal 2022, compared to fiscal 2021. The favorable SG&A rate was driven by 520 basis points favorable impact resulting from an overall leveraging of expenses due to higher revenues partially offset by higher discretionary expenses and performance-based compensation and higher government subsidies received in fiscal 2021.
SG&A Expenses. SG&A expenses increased by$181.6 million for fiscal 2022 compared to fiscal 2021. Approximately 60% of the increase, which included an unfavorable impact from currency translation, was driven by expenses resulting from higher net revenues, 20% from higher discretionary expenses and the remaining increase from higher performance-based compensation and higher government subsidies received in fiscal 2021. Currency translation fluctuations relating to our foreign operations unfavorably impacted SG&A expenses by$9.0 million . Asset Impairment Charges. During fiscal 2022, we recognized$0.7 million in impairment of certain operating lease right-of-use assets and$2.4 million in impairment of property and equipment related to certain retail locations resulting from lower revenue and future cash flow projections. This compares to$45.4 million in impairment of certain operating lease right-of-use assets and$35.0 million in impairment of property and equipment related to certain retail locations resulting from lower revenue and future cash flow projections from the ongoing effects of the COVID-19 pandemic during fiscal 2021. Currency translation fluctuations relating to our foreign operations favorably impacted asset impairment charges by$0.2 million during fiscal 2022.Net Gains on Lease Modifications. During fiscal 2022, we recorded net gains on lease modifications of$0.3 million related primarily to the early termination of lease agreements for certain of our retail locations. During fiscal 2021, we recorded net gains on lease modifications of$2.8 million . Operating Margin. Operating margin increased 15.0% to 11.8% for fiscal 2022, compared to negative 3.2% in fiscal 2021. Lower asset impairment charges recorded during fiscal 2022 favorably impacted operating margin by 4.2% compared to the prior year. Excluding the impact of these items, operating margin improved by 10.9% compared to the prior year. The favorable operating margin was driven by 700 basis points leveraging of expenses, 220 basis points from lower markdowns, and 100 basis points from higher initial markups. The positive impact of currency on operating margin for fiscal 2022 was approximately 10 basis points. Earnings (Loss) from Operations. Earnings from operations was$305.0 million for fiscal 2022, compared to loss from operations of$60.5 million in fiscal 2021. Currency translation fluctuations relating to our foreign operations unfavorably impacted earnings from operations by$4.9 million . 43 --------------------------------------------------------------------------------
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Interest Expense, Net. Interest expense, net, was$21.1 million for fiscal 2022, compared to$20.6 million in fiscal 2021. The increase in interest expense was due primarily to higher amortization of debt discount and higher interest expense related to our convertible senior notes.
Other Expense, Net. Other expense, net, was
Income Tax Expense (Benefit). Income tax expense for fiscal 2022 was$73.7 million , or a 29% effective income tax rate, compared to income tax benefit of$6.3 million , or a 7.3% effective income tax rate, in fiscal 2021. The change in the effective income tax rate was due primarily to a shift in the distribution of earnings among our tax jurisdictions and the reduction in valuation reserves during fiscal 2022, compared to the prior year.
Net Earnings Attributable to Noncontrolling Interests. Net earnings
attributable to noncontrolling interests for fiscal 2022 was
Net Earnings (Loss) Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. for fiscal 2022 increased$252.6 million , compared to net loss attributable to Guess?, Inc. in fiscal 2021. Diluted EPS increased$3.84 for fiscal 2022, compared to diluted loss per share in fiscal 2021. We estimate a net positive impact from share buybacks and our convertible senior notes transaction of$0.06 for fiscal 2022. We also estimate a negative impact of currency on diluted earnings per share for fiscal 2022 was approximately$0.19 per share. Refer to "Non-GAAP Measures" for an overview of our non-GAAP, or adjusted, financial results for fiscal 2022 and fiscal 2021. Excluding the impact of these non-GAAP items, adjusted net earnings attributable to Guess?, Inc. increased$199.2 million and adjusted diluted EPS increased$2.99 for the fiscal 2022 compared to adjusted net loss attributable to Guess?, Inc. and adjusted diluted loss per share for fiscal 2021. We estimate our share buybacks and convertible notes transaction had a net positive impact of$0.08 and currency had a negative impact of$0.19 on adjusted diluted EPS during fiscal 2022 when compared to fiscal 2021. 44 --------------------------------------------------------------------------------
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Information by Business Segment
The following presents our net revenue and earnings (loss) from operations by segment (dollars in thousands):
Fiscal 2022 Fiscal 2021 $ change % change
Net revenue:
Americas Retail $ 759,117 $ 510,806 $ 248,311 48.6 %
Americas Wholesale 201,202 117,607 83,595 71.1 %
Europe 1,297,550 941,546 356,004 37.8 %
Asia 237,053 232,574 4,479 1.9 %
Licensing 96,709 73,996 22,713 30.7 %
Total net revenue $ 2,591,631 $ 1,876,529 715,102 38.1 %
Earnings (loss) from operations:
Americas Retail $ 124,902 $ (15,776) 140,678 (891.7 %)
Americas Wholesale 53,731 19,912 33,819 169.8 %
Europe 174,860 66,790 108,070 161.8 %
Asia (4,114) (20,758) 16,644 (80.2 %)
Licensing 88,136 67,938 20,198 29.7 %
Total segment earnings from operations 437,515 118,106 319,409 270.4 %
Corporate overhead (129,588) (100,962) (28,626) 28.4 %
Asset impairment charges (3,149) (80,442) 77,293 (96.1 %)
Net gains on lease modifications 259 2,801 (2,542) (90.8 %)
Total earnings (loss) from operations $ 305,037 $ (60,497) 365,534 604.2 %
Operating margins:
Americas Retail 16.5 % (3.1 %)
Americas Wholesale 26.7 % 16.9 %
Europe 13.5 % 7.1 %
Asia (1.7 %) (8.9 %)
Licensing 91.1 % 91.8 %
Total Company 11.8 % (3.2 %)
Americas Retail
Net revenue from our Americas Retail segment increased by $248.3 million for
fiscal 2022, compared to fiscal 2021. In constant currency, net revenue
increased by 47.1% compared to the prior year. Approximately 60% of the increase
was driven by temporary store closures in the prior year and 40% of the increase
was driven by increases in comparable store sales. Excluding the impact from the
temporary store closures, the store base for the U.S. and Canada decreased by an
average of 23 net stores in fiscal 2022 compared to the prior year, resulting in
a 5.5% net decrease in average square footage. Currency translation fluctuations
relating to our non-U.S. retail stores and e-commerce sites favorably impacted
net revenue by $7.8 million .
Operating margin increased 19.6% for fiscal 2022, compared to fiscal 2021. Approximately 1,300 basis points of the increase was driven by leveraging of expenses, 480 basis points from lower markdowns, and 270 basis points from higher initial markups.
Earnings from operations from our Americas Retail segment increased by$140.7 million for fiscal 2022 compared to loss from operations for fiscal 2021. Approximately 70% of the increase was driven by higher net revenues, 25% from lower markdowns, and the remaining from higher initial markups. 45 --------------------------------------------------------------------------------
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Americas Wholesale
Net revenue from our Americas Wholesale segment increased by$83.6 million for fiscal 2022, compared to fiscal 2021. In constant currency, net revenue increased by 67.8% compared to the prior year. Approximately 80% of the increase was driven by ourU.S. wholesale business due mainly to higher demand. Additionally,Canada andMexico wholesale each contributed approximately 10% to the overall increase. Currency translation fluctuations relating to our non-U.S. wholesale businesses favorably impacted net revenue by$3.8 million . Operating margin increased 9.8% for fiscal 2022, compared to fiscal 2021, due primarily to leveraging of expenses and higher initial markups. The increase was driven by 950 basis points improvement resulting from leveraging of expenses, 110 basis points from higher initial markups, partially offset by higher freight costs. Earnings from operations from our Americas Wholesale segment increased by$33.8 million for fiscal 2022, compared to fiscal 2021. Nearly the entire increase was driven primarily by the favorable impact on earnings from higher revenue. Approximately 5% of the increase was driven by higher initial markups, partially offset by higher freight costs.
Net revenue from ourEurope segment increased by$356.0 million for fiscal 2022, compared to fiscal 2021. In constant currency, net revenue increased by 37.1% compared to the prior year. Approximately 60% of the increase was driven by higher wholesale shipments, partly due to a favorable shift of shipments from fiscal 2021 into fiscal 2022, 20% from temporary store closures in fiscal 2021, 10% from higher e-commerce, and 5% from higher comparable store sales. Net store development contributed a favorable 5% to the overall increase, partially offset by permanent store closures. Currency translation fluctuations relating to our European operations favorably impacted net revenue by$6.4 million . Operating margin increased 6.4% for fiscal 2022, compared to fiscal 2021. The increase was driven by a 980 basis points improvement due to overall leveraging of expenses, 160 basis points from lower markdowns, and 80 basis points in occupancy costs. The increase was partially offset by 260 basis points in discretionary expenses, 190 basis points from higher freight expense, and 130 basis points from higher government subsidies received in fiscal 2021. Earnings from operations from ourEurope segment increased by$108.1 million for fiscal 2022, compared to fiscal 2021. Approximately 140% of the increase was driven by higher revenue, 20% from lower markdowns, and 10% from lower occupancy expenses. This was partially offset by an unfavorable 30% impact from high discretionary expenses, 20% from higher freight expense, and 15% from government subsidies received in fiscal 2021. Currency translation fluctuations relating to our European operations unfavorably impacted earnings from operations by$6.8 million .Asia Net revenue from ourAsia segment increased by$4.5 million for fiscal 2022, compared to fiscal 2021. In constant currency, net revenue increased by 0.5% compared to the prior year. Approximately 250% of the increase was driven by new store development, 120% from higher e-commerce, 80% from temporary closures in the prior year, and 80% from increases comparable store sales. This was partially offset by a 220% decrease driven by permanent store closures and 200% decrease driven by lower wholesale shipments. Currency translation fluctuations relating to our Asian operations favorably impacted net revenue by$3.3 million . Operating margin improved 7.2% to negative 1.7% for fiscal 2022, from negative 8.9% in fiscal 2021. Approximately 490 basis points of the improvement was driven by business mix and 340 basis points from nonrecurring obsolescence reserves from fiscal 2021, partially offset by 130 basis points from decrease from nonrecurring one time benefits in occupancy and government subsidies received in fiscal 2021. Loss from operations from ourAsia segment was$4.1 million for fiscal 2022, compared to loss of$20.8 million in fiscal 2021. Approximately 50% of the improvement was driven by business mix and the remainder was mainly driven by nonrecurring obsolescence reserves. Currency translation fluctuations relating to our Asian operations unfavorably impacted loss from operations by$0.8 million . 46 --------------------------------------------------------------------------------
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Licensing
Net royalty revenue from our Licensing segment increased by$22.7 million for fiscal 2022, compared to in fiscal 2021. Earnings from operations from our Licensing segment increased by$20.2 million for fiscal 2022, from fiscal 2021. The increase was driven by the favorable impact to earnings from higher revenue.
Corporate Overhead
Unallocated corporate overhead increased by
Fiscal 2021 Compared to Fiscal 2020
The comparison of fiscal 2021 to fiscal 2020 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for fiscal 2021, filed with theSEC onApril 9, 2021 . Non-GAAP Measures Our reported financial results are presented in accordance with GAAP. The reported net earnings (loss) attributable to Guess?, Inc. and diluted earnings (loss) per share in fiscal 2022 and fiscal 2021 reflect the impact of certain professional service and legal fees and related (credits) costs, certain separation charges, asset impairment charges, net gains on lease modifications, non-cash amortization of debt discount on our convertible senior notes, the related income tax impacts of these adjustments as well as certain discrete income tax adjustments, where applicable. Fiscal 2021 also includes the impact from changes in the income tax law on deferred income taxes in certain tax jurisdictions, net income tax settlements and adjustments to specific uncertain income tax positions. These items affect the comparability of our reported results. The financial results are also presented on a non-GAAP basis, as defined in Section 10(e) of Regulation S-K of theSEC , to exclude the effect of these items. We believe that these "non-GAAP" or "adjusted" financial measures are useful for investors to evaluate the comparability of our operating results and our future outlook when reviewed in conjunction with our GAAP financial statements.
A reconciliation of reported GAAP results to comparable non-GAAP results follows (in thousands, except per share data):
Fiscal 2022 Fiscal 2021
Reported GAAP net earnings (loss) attributable to Guess?, Inc. $ 171,363 $ (81,229)
Certain professional service and legal fees and related (credits)
costs1 2,652 (565)
Separation charges2 - 3,413
Asset impairment charges3 3,149 80,442
Net gains on lease modifications4 (259) (2,801)
Amortization of debt discount5 11,125 10,394
Discrete income tax adjustments6 10,630 4,053
Income tax impact from adjustments7 (3,973) (18,228)
Total adjustments affecting net earnings (loss) attributable to Guess?, Inc.
23,324 76,708
Adjusted net earnings (loss) attributable to Guess?, Inc.
Net earnings (loss) per common share attributable to common stockholders: GAAP diluted$ 2.57 $ (1.27) Adjusted diluted$ 2.92 $ (0.07)
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Notes:
1 Amounts recorded represent certain professional service and legal fees and related (credits) costs, which we otherwise would not have incurred as part of our business operations.
2 Amounts represent certain separation-related charges due to headcount reduction in response to the pandemic and due to the separation of our former Chief Executive Officer.
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3 Amounts represent asset impairment charges related primarily to impairment of operating lease right-of-use assets and property and equipment related to certain retail locations resulting from lower revenue and future cash flow projections from the effects of the COVID-19 pandemic and expected store closures.
4 Amounts recorded represent net gains on lease modifications related primarily to the early termination of certain lease agreements.
5 InApril 2019 , we issued the Notes in a private offering. We have separated the Notes into liability (debt) and equity (conversion option) components. The debt discount, which represents an amount equal to the fair value of the equity component, is amortized as non-cash interest expense over the term of the Notes. 6 Amounts represent discrete income tax adjustments related primarily to the impacts from an intra-entity transfer of intellectual property rights to a wholly-owned Swiss subsidiary during the quarter endedOctober 30, 2021 , impacts from cumulative valuation allowances and the income tax benefits from an income tax rate change due to net operating loss carrybacks. 7 The income tax effect of certain professional service and legal fees and related (credits) costs, separation charges, asset impairment charges, net gains on lease modifications and the amortization of debt discount was based on our assessment of deductibility using the statutory income tax rate (inclusive of the impact of valuation allowances) of the tax jurisdiction in which the charges were incurred. Our discussion and analysis herein also include certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating our foreign revenue, expenses and balance sheet amounts intoU.S. dollars. These rate fluctuations can have a significant effect on reported operating results under GAAP. We provide constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate net revenue, comparable store sales and earnings (loss) from operations on a constant currency basis, operating results for the current-year period are translated intoU.S. dollars at the average exchange rates in effect during the comparable period of the prior year. To calculate balance sheet amounts on a constant currency basis, the current year balance sheet amount is translated intoU.S. dollars at the exchange rate in effect at the comparable prior-year period end. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information presented may not be comparable to similarly titled measures reported by other companies. In calculating the estimated impact of currency fluctuations (including translational and transactional impacts) on other measures such as earnings (loss) per share, we estimate gross margin (including the impact of foreign exchange currency contracts designated as cash flow hedges for anticipated merchandise purchases) and expenses using the appropriate prior-year rates, translates the estimated foreign earnings (loss) at the comparable prior-year rates and excludes the year-over-year earnings impact of gains or losses arising from balance sheet remeasurement and foreign exchange currency contracts not designated as cash flow hedges for merchandise purchases.
Liquidity and Capital Resources
We need liquidity globally primarily to fund our working capital, occupancy costs, interest payments on our debt, remodeling and rationalization of our retail stores, shop-in-shop programs, concessions, systems, infrastructure, compensation expenses, other existing operations, expansion plans, international growth and potential acquisitions and investments. If we experience a sustained decrease in consumer demand related to the COVID-19 pandemic, we may require access to additional credit, which may not be available to us on commercially acceptable terms, or at all. Generally, our working capital needs are highest during the late summer and fall as our inventories increase before the holiday selling period. In addition, in theU.S. , we need liquidity to fund share repurchases, including our 2022 ASR Contract, and payment of dividends to our stockholders. During fiscal 2022, we relied primarily on trade credit, available cash, real estate and other operating leases, finance leases, proceeds from our credit facilities and term loans and internally generated funds to finance our operations. We anticipate we will be able to satisfy our ongoing cash requirements during the next 12 months for working capital, capital expenditures, payments on our debt, finance leases and operating leases, as well as lease modification payments, potential acquisitions and investments, expected income tax payments, and share repurchases and dividend payments to stockholders, primarily with cash flow from operations and existing cash balances as supplemented by borrowings under our existing Credit Facilities and proceeds from our term loans, as needed. (Such arrangements are described further in "Part IV. Financial Statements - Note 8 - Borrowings and Finance Lease Obligations" in this Form 10-K.)Due to the seasonality of our business and cash needs, we may increase borrowings under our established credit facilities or enter new credit facilities from time-to-time, during 48 --------------------------------------------------------------------------------
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the next 12 months and beyond. We are currently considering entering into a long-term revolving credit agreement through our European subsidiary. This agreement, if executed, would replace the existing credit facilities in our European subsidiary.
We expect to settle the principal amount of our outstanding Notes in 2024 in cash and any excess in shares. Our outstanding Notes may be converted at the option of the holders as described in "Part IV. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions." As ofJanuary 29, 2022 , none of the conditions allowing holders of the convertible notes to convert had been met. Pursuant to one of these conditions, if our stock trading price exceeds 130% of the initial conversion price of the convertible notes of$25.78 for at least 20 trading days during the 30 consecutive trading-day period ending on, and including, the last trading day of any calendar quarter, holders of the convertible notes would have the right to convert their convertible notes during the next calendar quarter. In connection with the increase to the quarterly cash dividend, we will adjust the conversion price (which is expected to decrease) of the Notes in accordance with the terms of the indenture governing the Notes. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the indenture governing the Notes. The convertible note hedge transaction we entered into in connection with our issuance of the Notes is expected generally to reduce the potential dilution upon conversion of the convertible notes and/or offset any cash payments we are required to make in excess of the principal amount of convertible notes that are converted, as the case may be. (Such arrangements are described further in "Part IV. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions" in this Form 10-K.) OnMarch 27, 2020 , theU.S. government enacted the CARES Act to provide economic relief from the COVID-19 pandemic. Among other provisions, the CARES Act allows for a full offset of taxable income in a five-year carryback period for net operating losses, which will reduce current period income tax expense and may result in a refund of previously paid income tax amounts at higher historical income tax rates. For the year endedJanuary 30, 2021 , we recognized a tax benefit of$0.9 million related to the CARES Act. We have a balance related to the 2017 Tax Cuts and Jobs Act (the "Tax Reform") transition tax included in other long-term liabilities of$19.9 million (excluding related interest) as ofJanuary 29, 2022 andJanuary 30, 2021 . Refer to "Part IV. Financial Statements - Note 12 - Income Taxes" for further detail. We have historically considered the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested. As a result of the Tax Reform, we had a substantial amount of previously taxed earnings that could be distributed to theU.S. without additionalU.S. taxation. We continue to evaluate our plans for reinvestment or repatriation of unremitted foreign earnings and regularly review our cash positions and determination of permanent reinvestment of foreign earnings. If we determine that all or a portion of such foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes andU.S. state income taxes, beyond the one-time transition tax. As ofJanuary 29, 2022 , we determined that approximately$7.4 million of such foreign earnings are no longer indefinitely reinvested. The incremental income tax cost to repatriate these earnings to theU.S. is immaterial. We intend to indefinitely reinvest the remaining earnings from our foreign subsidiaries for which a deferred income tax liability has not already been recorded. It is not practicable to estimate the amount of income tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation. As ofJanuary 29, 2022 , we had cash and cash equivalents of$415.6 million , of which approximately$178.2 million was held in theU.S. Excess cash and cash equivalents, which represent the majority of our outstanding cash and cash equivalents balance, are held primarily in overnight deposit and short-term time deposit accounts and money market accounts. Refer to "Part I, Item 1A. Risk Factors" for a discussion of risk factors which could reasonably be likely to result in a decrease of internally generated funds available to finance capital expenditures and working capital requirements.
COVID-19 Impact on Liquidity
Refer to the "-COVID-19 Business Update" section and in "Part IV. Financial Statements - Note 1 - Description of the Business and Summary of Significant Accounting Policies and Practices" for a discussion of the impact from the COVID-19 pandemic on our financial performance and our liquidity.
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In light of store closures and reduced traffic in stores, we took certain actions with respect to certain of our existing leases, including engaging with landlords to discuss rent deferrals, as well as other rent concessions. Throughout the COVID-19 pandemic, we suspended rental payments and/or paid reduced rental amounts with respect to our retail stores that were closed or experiencing drastically reduced customer traffic as a result of the COVID-19 pandemic. During fiscal 2022 and fiscal 2021, we successfully negotiated with several landlords, including some of our larger landlords, and have received rent abatement benefits, as well as new lease terms for some of our affected leases. We continue to engage in discussions with additional affected landlords in an effort to achieve appropriate rent relief and other lease concessions and, in some cases, to terminate existing leases. In a few instances, where negotiations with landlords have proven unsuccessful, we are engaged in litigation related to rent obligations both during the COVID-19 pandemic and through the term of the lease.
Fiscal 2022 Compared to Fiscal 2021
Operating Activities
Net cash provided by operating activities was$131.6 million for the fiscal year endedJanuary 29, 2022 , compared to$209.1 million for the fiscal year endedJanuary 30, 2021 , or a decrease of$77.4 million . The deterioration was driven primarily by unfavorable changes in working capital and higher income tax payments, partially offset by higher cash flows generated from net earnings. The unfavorable changes in working capital were due primarily to higher inventory as we placed orders earlier in order to mitigate some of the supply chain disruptions and higher accounts receivable driven by higher wholesale shipments. Cash flows generated from net earnings were negatively impacted by$107.2 million U.S. income tax payment related to the intra-entity transfer of intellectual property rights transaction during fiscal 2022.
Investing Activities
Net cash used in investing activities was
The increase in cash used in investing activities was driven primarily by higher retail remodel and international expansion costs and higher strategic investments in technology during fiscal 2022 compared to fiscal 2021. During the fiscal year endedJanuary 29, 2022 , we opened 87 directly operated stores compared to 22 directly operated stores that were opened in the prior year.
Financing Activities
Net cash used in financing activities was$97.0 million for the fiscal year endedJanuary 29, 2022 , compared to$9.9 million for the fiscal year endedJanuary 30, 2021 . Net cash used in financing activities related primarily to repurchases in our common stock under our equity plan, repayments on borrowings and finance lease obligations and payment of dividends. The increase in cash used in financing activities was driven primarily by lower proceeds received from borrowings, higher payment of dividends and higher share repurchases, partially offset by lower repayments of borrowings and finance lease obligations during fiscal 2022 compared to the prior year.
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash
During the fiscal year endedJanuary 29, 2022 , changes in foreign currency translation rates decreased our reported cash, cash equivalents and restricted cash balance by$26.1 million . This compares to an increase of$7.5 million in cash, cash equivalents and restricted cash driven by changes in foreign currency translation rates during the fiscal year endedJanuary 30, 2021 .
Working Capital
As of
Our primary working capital needs are for the current portion of lease liabilities, accounts receivable and inventory. The accounts receivable balance consists of trade receivables relating primarily to our wholesale
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business inEurope and, to a lesser extent, to our wholesale businesses in theAmericas andAsia , royalty receivables relating to our licensing operations, credit card and retail concession receivables related to our retail businesses and certain other receivables. Accounts receivable increased by$14.7 million , or 4.7%, to$328.9 million as ofJanuary 29, 2022 , compared to$314.1 million atJanuary 30, 2021 . On a constant currency basis, accounts receivable increased by$40.7 million , or 12.9%, when compared toJanuary 30, 2021 . As ofJanuary 29, 2022 , approximately 50% of our total net trade receivables and 64% of our European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. Our credit insurance coverage contains certain terms and conditions specifying deductibles and annual claim limits. Inventory increased by$73.2 million , or 18.8%, to$462.3 million as ofJanuary 29, 2022 , from$389.1 million atJanuary 30, 2021 . On a constant currency basis, inventory increased by$99.7 million , or 25.6%, when compared toJanuary 30, 2021 , driven primarily by management initiatives to mitigate supply chain disruptions, including accelerating product orders.
Material Cash Requirements
The following summarizes our material cash requirements for known contractual and other obligations as ofJanuary 29, 2022 and the effects such obligations are expected to have on liquidity and cash flow in future periods (in thousands): Payments due by period Less than More than Total 1 year 1-3 years 3-5 years 5 years Contractual Obligations: Short-term borrowings$ 12,201 $ 12,201
$ - $ - $ - Convertible senior notes, net1,2
315,000 6,000 309,000 - -
Long-term debt, excluding convertible
senior notes, net1 71,408 26,186 26,330 18,892 -
Finance lease obligations1 25,611 6,872 11,607 6,444 688
Operating lease obligations3 856,246 218,407 292,639 167,878 177,322
Purchase obligations4 258,612 258,612 - - -
Benefit obligations5 81,765 2,882 5,444 8,428 65,011
Total $ 1,620,843 $ 531,160 $ 645,020 $ 201,642 $ 243,021
Other commercial commitments6 $ 10,063 $ 3,600 ______________________________________________________________________
1Includes interest payments.
2In
3We have elected the practical expedient to not separate non-lease components from lease components in the measurement of liabilities for our directly-operated real estate leases. As such, this amount reflects operating lease costs that are considered in the measurement of the related operating lease liabilities, which may include fixed payments related to rent, insurance, property taxes, sales promotion, common area maintenance and certain utility charges, where applicable. This does not include variable lease costs that are excluded from the measurement of the operating lease liabilities, such as those charges that are based on a percentage of annual sales volume or estimates. In fiscal 2022, these variable charges totaled$77.5 million . Refer to "Part IV. Financial Statements - Note 9 - Lease Accounting" for further detail.
4Purchase obligations represent open purchase orders for raw materials and merchandise at the end of the fiscal year. These purchase orders can be impacted by various factors, including the scheduling of market weeks, the timing of issuing orders, the timing of the shipment of orders and currency fluctuations.
5Includes expected payments associated with the deferred compensation plan and the Supplemental Executive Retirement Plan through fiscal 2055.
6Consists of standby letters of credit for rent guarantees, workers' compensation and general liability insurance.
Excluded from the above contractual obligations table is the noncurrent liability for unrecognized tax benefits, including penalties and interest, of$57.5 million . This liability for unrecognized tax benefits has been excluded because we cannot make a reliable estimate of the period in which the liability will be settled, if ever. 51
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The above table also excludes current liabilities (other than short-term borrowings) as these amounts will be paid within one year and certain long-term liabilities that do not require cash payments.
Off-Balance Sheet Arrangements
Other than certain obligations and commitments included in the table above, we
did not have any material off-balance sheet arrangements as of
Capital Expenditures
Gross capital expenditures totaled$63.5 million , before deducting lease incentives of$3.1 million , for the fiscal year endedJanuary 29, 2022 . This compares to gross capital expenditures of$18.9 million , before deducting lease incentives of$2.3 million , for the fiscal year endedJanuary 30, 2021 .
We will periodically evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives.
Dividends
OnMarch 16, 2022 , we announced a regular quarterly cash dividend of$0.225 per share on our common stock. The cash dividend will be paid onApril 15, 2022 to shareholders of record as of the close of business onMarch 30, 2022 . OnNovember 23, 2021 , we announced an increase to our regular quarterly cash dividend from$0.1125 to$0.225 per share on our common stock. In connection with the increase to the quarterly cash dividend, we will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to decrease) of the Notes in accordance with the terms of the indenture governing the Notes. Refer to "Part IV. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions" in this Form 10-K for disclosures about the Notes. Decisions on whether, when and in what amounts to continue making any future dividend distributions will remain at all times entirely at the discretion of our Board of Directors, which reserves the right to change or terminate our dividend practices at any time and for any reason without prior notice. The payment of cash dividends in the future will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions andU.S. and global liquidity.
Share Repurchases
OnAugust 23, 2021 , our Board of Directors terminated the previously authorized 2012 share repurchase program (which had$47.8 million capacity remaining) and authorized a new program (the "2021 Share Repurchase Program") to repurchase, from time-to-time and as market and business conditions warrant, up to$200 million of our common stock. As ofJanuary 29, 2022 , we had remaining authority under the 2021 Share Repurchase Program to purchase$149.0 million of our common stock. OnMarch 14, 2022 , the Board of Directors expanded its repurchase authorization by$100 million , leaving a new capacity of$249.0 million . Repurchases under the program may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under the program, which may be discontinued at any time, without prior notice. During fiscal 2022, we repurchased 2,289,292 shares under the program at an aggregate cost of$51.0 million . During fiscal 2021, we repurchased 4,000,000 shares under the previous program at an aggregate cost of$38.8 million . During fiscal 2020, we repurchased 16,739,740 shares at an aggregate cost of$288.1 million , which is inclusive of the shares repurchased under theApril 26, 2019 ASR Contract.
On
Borrowings and Finance Lease Obligations
Refer to "Part IV. Financial Statements - Note 8 - Borrowings and Finance Lease
Obligations" in this Form 10-K for disclosures about our borrowings and finance
lease obligations.
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Supplemental Executive Retirement Plan
On
As a non-qualified pension plan, no dedicated funding of the SERP is required; however, we have made periodic payments into insurance policies held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP. The amount of any future payments into the insurance policies, if any, may vary depending on investment performance of the trust. The cash surrender values of the insurance policies were$70.9 million and$72.1 million as ofJanuary 29, 2022 andJanuary 30, 2021 , respectively, and were included in other assets in our consolidated balance sheets. As a result of changes in the value of the insurance policy investments, we recorded unrealized gains of$0.6 million ,$6.1 million and$7.6 million in other income (expense) during fiscal 2022, fiscal 2021 and fiscal 2020, respectively. The projected benefit obligation was$49.4 million and$52.3 million as ofJanuary 29, 2022 andJanuary 30, 2021 , respectively, and was included in accrued expenses and other long-term liabilities in our consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of$1.9 million and$1.7 million were made during fiscal 2022 and fiscal 2021, respectively.
Employee Stock Purchase Plan
Our qualified employee stock purchase plan ("ESPP") allows qualified employees
(as defined) to participate in the purchase of designated shares of our 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. We have 4,000,000 shares of
common stock registered under the ESPP. During the year ended January 29, 2022 ,
38,144 shares of our common stock were issued pursuant to the ESPP at an average
price of $11.81 per share for a total of $0.5 million .
Critical Accounting Policies and Estimates
The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in theU.S. , which require management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on its historical experience, an evaluation of current market trends as of the reporting date and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management evaluates its estimates and judgments on an ongoing basis including those related to the allowances for doubtful accounts, sales return and markdown allowances, gift card and loyalty accruals, valuation of inventories, share-based compensation, recoverability of deferred taxes, unrecognized tax benefits, the useful life of assets for depreciation and amortization, evaluation of asset impairment (including goodwill and long-lived assets, such as property and equipment and operating lease right-of-use ("ROU") assets), pension obligations, workers' compensation and medical self-insurance expense and accruals, litigation reserves and restructuring expense and accruals. We believe that the following significant accounting policies involve a higher degree of judgment and complexity. In addition to the accounting policies mentioned below, refer to "Part IV. Financial Statements - Note 1 - Description of the Business and Summary of Significant Accounting Policies and Practices" in this Form 10-K for other significant accounting policies.
Allowances for Doubtful Accounts
In the normal course of business, we grant credit directly to certain wholesale
customers after a credit analysis is performed based on financial and other
criteria. Accounts receivable are recorded net of an allowance for doubtful
accounts. We maintain allowances for doubtful accounts for estimated losses that
result from the inability of our wholesale customers to make their required
payments. We base our allowances on analysis of the aging of accounts receivable
at the date of the financial statements, assessments of historical and current
collection trends, an evaluation of the impact of current economic conditions
and whether we obtained credit insurance or other guarantees which are not
considered freestanding against the related account receivable balances.
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Sales Return Allowances
We accrue for estimated sales returns in the period in which the related revenue is recognized. To recognize the financial impact of sales returns, we estimate the amount of goods that will be returned based on historical experience and current trends and reduce sales and cost of sales accordingly. Our policy allows retail customers in certain regions a grace period to return merchandise following the date of sale. Substantially all of these returns are considered to be resalable at a price that exceeds the cost of the merchandise. We include the allowance for sales returns in accrued expenses and the estimated cost associated with such sales returns within other current assets in our consolidated balance sheet.
Markdown Allowances
Costs associated with customer markdowns are recorded as a reduction to revenues and any amounts unapplied to existing receivables are included in accrued expenses. Historically, these markdown allowances resulted from seasonal negotiations with our wholesale customers, as well as historical trends and the evaluation of the impact of current economic conditions.
Gift Cards
Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by us for which a liability was recorded in prior periods. Gifts cards are mainly used in theU.S. andCanada . We issue our gift cards in theU.S. andCanada through one of our subsidiaries and are 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. We determined a gift card breakage rate based upon historical redemption patterns, which represented the cumulative estimated amount of gift card breakage from the inception of the electronic gift card program in late 2002. Any future revisions to the estimated breakage rate may result in changes in the amount of breakage income recognized in future periods.
Loyalty Programs
We have customer loyalty programs inNorth America ,Europe andAsia which cover all of our brands. Under certain of the programs, primarily in theU.S. andCanada , 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. Where applicable, we allocate a portion of the transaction price from sales in our direct-to-consumer channel to our loyalty program by using historical redemption rates to estimate the value of future award redemptions. This amount is accrued in current liabilities and recorded as a reduction of net revenue in the period which the related revenue is recognized.
Inventory Reserves
Inventories are valued at the lower of cost (primarily weighted average method) or net realizable value. We continually evaluate our inventories by assessing slow moving product as well as prior seasons' inventory. Net realizable value of aged inventory is estimated based on historical sales trends for each product line category, the impact of market trends, an evaluation of economic conditions, available liquidation channels and the value of current orders relating to the future sales of this type of inventory. We closely monitor off-price sales to ensure the actual results closely match initial estimates. Estimates are regularly updated based upon this continuing review.
Share-Based Compensation
We recognize compensation expense for all share-based awards granted based on the grant date fair value. The fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model and involves several assumptions, including the risk-free interest rate, expected volatility, dividend yield and expected life. The risk-free interest rate is based on theU.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 our common stock. The expected dividend yield is based on our history and expectations of dividend payouts. The expected life is determined based on historical trends. Compensation expense for nonvested stock options and 54
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stock awards/units that are not subject to performance-based vesting conditions is recognized on a straight-line basis over the vesting period. We have elected to account for forfeitures as they occur. In addition, we have granted certain nonvested units that require certain minimum performance targets to be achieved in order for these awards to vest. Vesting is also subject to continued service requirements through the vesting date. Compensation expense for performance-based awards that vest in increments is recognized based on an accelerated attribution method. If the minimum performance targets are not forecasted to be achieved, no expense is recognized during the period. We have also granted certain nonvested stock units which are subject to market-based performance targets in order for these units to vest. Vesting is also subject to continued service requirements through the vesting date. The grant date fair value for such nonvested stock units was estimated using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the performance period. Compensation expense for such nonvested stock units is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied. Certain restricted stock units vest immediately but are considered contingently returnable as a result of certain service conditions. Compensation expense for these types of restricted stock units are recognized on a straight-line basis over the implied service period.
Derivatives
Foreign Exchange Currency Contracts
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. We have entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. We have elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges. Our primary objective is to hedge the variability in forecasted cash flows due to the foreign currency risk. Various transactions that occur primarily inEurope ,Canada ,South Korea ,China ,Hong Kong , andMexico are denominated inU.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 includeU.S. dollar-denominated purchases of merchandise andU.S. dollar- and British pound-denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. Further, there are certain real estate leases which are denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). As a result, we may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end. We enter into derivative financial instruments, including forward exchange currency contracts, to offset some but not all of the exchange risk on certain of these anticipated foreign currency transactions. Changes in the fair value of forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold. Periodically, we may also use foreign exchange currency contracts to hedge the translation and economic exposures related to our net investments in certain of our international subsidiaries. Changes in the fair value of theseU.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. We also have foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense). 55 --------------------------------------------------------------------------------
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Interest Rate Swap Agreements
We are exposed to interest rate risk on our floating-rate debt. We have entered into interest rate swap agreements to effectively convert our 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 our floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. We have elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity and are amortized to interest expense over the term of the related debt. Periodically, we may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense).
Income Taxes
We adopted authoritative guidance which clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements and
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of an income tax position taken or
expected to be taken in an income tax return. For those benefits to be
recognized, a tax position must be more likely than not to be sustained upon
examination by taxing authorities. Guidance was also provided on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
Our continuing practice is to recognize interest and penalties related to income
tax matters in income tax expense. As required under applicable accounting
rules, we accrue an amount for our estimate of additional income tax liability
which, more likely than not, we will incur as a result of the ultimate
resolution of income tax audits ("uncertain tax positions"). We review and
update the estimates used in the accrual for uncertain income tax positions, as
appropriate, as more definitive information or interpretations become available
from taxing authorities, upon completion of income tax audits, upon receipt of
assessments, upon expiration of statutes of limitation, or upon occurrence of
other events. The results of operations and financial position for future
periods could be impacted by changes in assumptions or resolutions of tax
audits.
Deferred income tax assets and liabilities are determined based on differences
between financial reporting bases and tax bases of assets and liabilities and
are measured using the enacted tax rates expected to apply to taxable income in
the periods in which the deferred income tax asset or liability is expected to
be realized or settled. Deferred income tax assets are reduced by valuation
allowances if we believe it is more likely than not that some portion or the
entire asset will not be realized. We have historically considered the
undistributed earnings of our foreign subsidiaries to be indefinitely
reinvested. As a result of the Tax Reform, we had a substantial amount of
previously taxed earnings that could be distributed to the U.S. without
additional material U.S. taxation. We continue to evaluate our plans for
reinvestment or repatriation of unremitted foreign earnings and regularly review
our cash positions and determination of permanent reinvestment of foreign
earnings. If we determine that all or a portion of such foreign earnings are no
longer indefinitely reinvested, we may be subject to additional foreign
withholding taxes and U.S. state income taxes, beyond the one-time transition
tax. For example, as of January 29, 2022 , we determined that approximately
$7.4 million of such foreign earnings are no longer indefinitely reinvested. The
incremental tax cost to repatriate these earnings to the U.S. is immaterial. We
intend to indefinitely reinvest the remaining earnings from our foreign
subsidiaries for which a deferred income tax liability has not already been
recorded. It is not practicable to estimate the amount of income tax that might
be payable if these earnings were repatriated due to the complexities associated
with the hypothetical calculation.
We completed an intra-entity transfer of intellectual property rights from a
U.S. entity to a wholly-owned Swiss subsidiary, more closely aligning our
intellectual property rights with our business operations. This transaction
resulted in a taxable gain and income tax expense in the U.S. The U.S. taxable
gain and income tax expense generated by this intercompany transfer of
intellectual property was primarily offset by the recognition of a deferred
income tax asset in the Swiss subsidiary.
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Valuation of
We assess the impairment of our long-lived assets (related primarily to goodwill, property and equipment and operating right-of-use assets), which requires us to make assumptions and judgments regarding the carrying value of these assets on an annual basis, or more frequently if events or changes in circumstances indicate that the assets might be impaired. For goodwill, determination of impairment is made at the reporting unit level which may be either an operating segment or one level below an operating segment if discrete financial information is available. Two or more reporting units within an operating segment may be aggregated for impairment testing if they have similar economic characteristics. We have identified our Americas Retail segment, our Americas Wholesale segment and our European wholesale and European retail components of ourEurope segment as reporting units for goodwill impairment testing. For long-lived assets (other than goodwill), the majority relate to our retail operations which consist primarily of regular retail and flagship locations. We consider each individual regular retail location as an asset group for impairment testing, which is the lowest level at which individual cash flows can be identified. The asset group includes leasehold improvements, furniture, fixtures and equipment, computer hardware and software, operating lease right-of-use ("ROU") assets including lease acquisition costs, and certain long-term security deposits, and excludes operating lease liabilities. We review regular retail locations in penetrated markets for impairment risk once the locations have been opened for at least one year in their current condition, or sooner as changes in circumstances require. We believe that waiting at least one year allows a location to reach a maturity level where a more comprehensive analysis of financial performance can be performed. We evaluate impairment risk for regular retail locations in new markets, where we are in the early stages of establishing our presence, once brand awareness has been established. We also evaluate impairment risk for retail locations that are expected to be closed in the foreseeable future. We have flagship locations which are used as a regional marketing tool to build brand awareness and promote our current product. Provided the flagship locations continue to meet appropriate criteria, impairment for these locations is tested at a reporting unit level similar to goodwill since they do not have separately identifiable cash flows. An asset is considered to be impaired if we determine that the carrying value may not be recoverable based upon our 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 our strategic business objectives and utilization of the assets occurred. If the assets (other than goodwill) are assessed to be recoverable, they are depreciated or amortized over the periods benefited. If the assets are considered to be impaired, an impairment charge is recognized representing the amount by which the carrying value of the assets exceeds the fair value of those assets. We use market participant rents to calculate fair value of ROU assets and discounted future cash flows of the asset group to quantify fair value for other long-lived assets. 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, which include sales and gross margin growth rate assumptions, over the remaining lease period or expected life, if shorter. For expected location closures, we will evaluate whether it is necessary to shorten the useful life for any of the assets within the respective asset group. We will use this revised useful life when estimating the asset group's future cash flows. We consider historical trends, expected future business trends and other factors when estimating the future cash flow for each regular retail location. We also consider factors such as: the local environment for each regular retail location, including mall traffic and competition; our ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll and, in some cases, renegotiate lease costs. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to our results of operations.
Pension Benefit Plan Actuarial Assumptions
Our pension obligations and related costs are calculated using actuarial
concepts, within the authoritative guidance framework. We use the corridor
approach to amortize unrecognized actuarial gains or losses over the average
remaining service life of active participants. The life expectancy, estimated
retirement age, discount rate, estimated future compensation and expected return
on plan assets are important elements of expense and/or liability measurement.
These critical assumptions are evaluated annually which enables expected future
payments for benefits to be stated at present value on the measurement date. If
actual results are not consistent with actuarial
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assumptions, the amounts recognized for the defined benefit plans could change significantly. Refer to "Part IV. Financial Statements - Note 13 - Defined Benefit Plans" in this Form 10-K for detail regarding our defined benefit plans.
Litigation Reserves
Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. As additional information becomes available, we assess the potential liability related to new claims and existing claims and revise 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.
Convertible Senior Notes
In
Certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The liability component was recorded at fair value, which was derived from a valuation technique used to calculate the fair value of a similar liability without an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Notes and the fair value of the liability component of the Notes. In accounting for the debt issuance costs related to the issuance of the Notes, we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component were recorded as a contra-liability and are presented net against the convertible senior notes balance on our consolidated balance sheets. These costs are amortized to interest expense using the effective interest method over the term of the Notes. Refer to "Part IV. Financial Statements - Note 2 - New Accounting Guidance" and "Part IV. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions" in this Form 10-K for details on our convertible senior notes.
Recently Issued Accounting Guidance
Refer to "Part IV. Financial Statements - Note 2 - New Accounting Guidance" in this Form 10-K for disclosures about recently issued accounting guidance.
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