Guess' Inc. (NYSE:GES) Q3 2018 Earnings Conference Call Transcript

Nov 21, 2017 • 04:45 pm ET

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Guess' Inc. (NYSE:GES) Q3 2018 Earnings Conference Call Transcript

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Presentation
Operator
Operator

Good day, everyone, and welcome to the Guess? Third Quarter Fiscal 2018 Earnings Conference Call. On the call are Victor Herrero, CEO; and Sandeep Reddy, CFO.

(Forward-Looking Cautionary Statements)

Now, I'd like to turn the call over to Victor Herrero.

Executive
Victor Herrero

Good afternoon, everyone. As you saw in our earnings release today, we reported that adjusted earnings per share for the quarter finished above our guidance, while adjusted operating margin finished within the range of our guidance. I will discuss the progress that we have made in our initiatives, so you can better understand why we are raising our guidance for the year.

Starting with Europe. Revenues for the quarter grew 19% in US dollars and 12% in constant currency, showing continued momentum from successful implementation of our strategic initiative to elevate the quality of our sales and merchandising organization. The growth was driven by comps, including e-commerce up 10% in US dollar and 4% in constant currency, and by new store openings. This comp increase came despite an unseasonally warm October that resulted in lower AUR due to reduced sales of outerwear and heavier fall product. Our e-commerce business in Europe continues to grow rapidly, powered by our own website as well as our partnership with Otto and Zalando.

During the quarter, we opened 22 directly-operated stores in Europe on a net basis, 11 of which were in Russia and in Turkey, our fastest-growing markets. We also opened stores in Italy, Spain, Greece, UK, Germany, Poland and our first owned and operated store in Hungary.

We are also thrilled with the increasing strength of our European wholesale business. The Spring/Summer 2018 order book closed up in the mid-teens in constant currency, an acceleration from the Fall/Winter 2017 order book increase of low-double-digits. This is now the second consecutive season of double-digit growth in the European wholesale business, which reflects our progress on the strategic initiative I outlined more than two years ago to revitalize the wholesale channel.

Following four consecutive quarters of margin expansion, the European segment margin contracted 320 basis points in the quarter. The main driver of margin contraction this quarter was the timing and magnitude of start-up costs related to our new distribution center in Venlo. The distribution center is expected to be fully operational by the first quarter of next year instead of by the end of this year as initially planned. We fully expect margin expansion for Europe to resume once the transition to the new distribution center is behind us.

Moving to Asia. Third quarter revenues were up 17% in US dollar and 18% in constant currency. Revenue growth in the region was driven by comps, including e-commerce, that were up 3% in US dollar and 5% in constant currency, and by new store openings. During the quarter, we opened 10 directly-operated stores in China on a net basis. We opened stores in Shanghai, Hangzhou and Suzhou in the East; Harbin, Changchun and Shenyang in the Northeast; Xi'an in the Northwest; Wuhan in the Center;